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3 Overvalued Stocks That Are Worth the Investment

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Is there ever a right time to buy an overvalued stock on the TSX index? When a company’s stock starts to rise and indications suggest that it will continue to do so, upside chasers are often right to jump on at the start of a trend, while some other stocks have gravity-defying characteristics that make a short-term investment a lucrative option. Then again, a stock may simply be worth having at any price; the following three stocks fit into at least one of these categories.

BlackBerry (TSX:BB)(NYSE:BB)

The share price of this Canadian tech giant has leapt 11.14% in the last five days. Even for tech stocks, that’s quite a jump, while five-year average past earnings growth of 68.7% show that BlackBerry is a seasoned ticker to get behind. Even better, its debt compared to net worth has been brought down effectively over the last five years from 44.9% to a safer 25.2%.

While a 13.8% expected annual growth in earnings suggests good things ahead, BlackBerry got on this list by being poor value for money at the moment, so let’s take a look at the damage: trading with a P/B ratio of 2.1 times book is no great sin for a tech stock, though a P/E of 58.6 times earnings is another story. However, with a number of interesting projects lined up, BlackBerry might be worth the extra outlay.

Fortis (TSX:FTS)(NYSE:FTS)

Outside of bank stocks, stacking shares in utilities like Fortis is among the best strategies for adding backbone to a flimsy portfolio. This TSX index super-stock might not be the best buy right now, though; from hidden overvaluation to a mediocre balance sheet, Fortis might be one for the watch list.

While a one-year past earnings-growth rate of 14.2% indicates a solid track record (as does a five-year average of 24.4%), its level of debt compared to net worth has crept up over the last five years from 123% to today’s 134.3%. additionally, all is not as it seems in terms of value. A PEG of four times growth aligns with an overvaluation by over six times the future cash flow, showing that too much faith can be placed in a P/E ratio.

Canadian Pacific Railway (TSX:CP)(NYSE:CP)

Railway stocks are a firm favourite with pundits and investors in infrastructure alike; however, they’re not always great value for money, as the stats Canadian Pacific Railway show. Overvalued by 40% of its future cash flow value, this bankable train ticker has a P/E of 20.2 times earnings and P/B of 5.8 times book.

One-year returns of 21.2% and a five-year average past earnings growth of 16.2% signify a stock worth having, though, while a past-year ROE of 29% is a hallmark of quality. While its debt to net worth has increased in the course of the last half-decade from 68.2% to 131% today, a small dividend yield of 0.94% and 10% expected annual growth in earnings indicate a decent long-term play.

The bottom line

While these overvalued stocks are arguably worth the outlay, overvaluation is not always easy to spot. Fortis may go unnoticed by value-focused investors, for instance, with two of the most common indicators of this characteristic (its P/E of 19.1 times earnings and P/B of 1.4 times book) suggesting near-market valuation; however, its stable dividends and solidly defensive status make it a stock worth buying.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Victoria Hetherington has no position in any of the stocks mentioned. The Motley Fool owns shares of BlackBerry. BlackBerry is a recommendation of Stock Advisor Canada.

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