Quant Model Year End Update: Top 5 Overvalued S&P 500 Stocks

by: Apus Investments


Proprietary model screens all stocks on the S&P 500 and uses regression analysis to identify outliers.

I only look for stocks that are several standard deviations from the mean in their valuation.

The model is based on a mean-reversion assumption for extreme outliers.

I have identified the 5 most overvalued companies (growth adjusted) on the S&P 500.


Apus Investments' Quant Model ("AIQ Model") uses a proprietary system to identify stocks that are extreme outliers in their valuation relative to the mean of index constituents. The model is currently focused on the S&P 500 Index and uses several criteria to rank stocks:

  • 3 year forward growth rates for revenue, EBITDA, and EPS
  • Trading multiples for P/Sales, EV/EBITDA, P/E and P/BV
  • Cash flow margins and ability to generate cash
  • Leverage metrics and balance sheet strength

After taking into account each stock's current valuation (adjusted for growth rates and leverage ratios) the model uses regression analysis to determine fair value of each company relative to the index constitutions.

Sector specialists will be quick to point that each sector has its own metrics and nuances that a generalist approach does not take into consideration. We agree with this point wholeheartedly, but that is not the purpose of the quant model. The purpose of the AIQ Model is to identify stocks that are such extreme outliers in their valuation (adjusted for growth) that we expect to see some sort of mean reversion regardless of certain qualitative issues or sector nuances.

Top 5 Short Ideas

Based on our most recent screen of the S&P 500 and applying our proprietary system, the below companies represent the top 5 most overvalued (growth adjusted) stocks. We believe all of these stocks are significant enough outliers from the mean of constituents to justify a case for mean reversion.

Source: Author's analysis using Capital IQ consensus estimates.

Salesforce.com (NYSE:CRM) trades at 41.6x 2015E EBITDA and 115.1x 2015E EPS with Revenue growth of 61% and EPS growth of 105% from 2014 - 2016E.

Salesforce.com, Inc. provides enterprise cloud computing solutions to various businesses and industries worldwide. The company offers social and mobile cloud apps and platform services.

Netflix (NASDAQ:NFLX) trades at 28.2x 2015E EBITDA and 72.4x 2015E EPS with Revenue growth of 48% and EPS growth of 125% from 2014 - 2016E.

Netflix, Inc. operates as an internet television network, is engaged in the internet delivery of TV shows and movies directly on TVs, computers, and mobile devices in the United States and internationally. The company operates in three segments: Domestic Streaming, International Streaming, and Domestic DVD.

Yahoo! (YHOO) trades at 29.6x 2015E EBITDA and 44.9x 2015E EPS with Revenue growth of 3% and EPS growth of -21% from 2014 - 2016E.

Yahoo! Inc. operates as a technology company worldwide. The company offers Yahoo Search, Yahoo Answers, Yahoo Finance Yahoo Entertainment and Lifestyles and other divisions.

Autodesk (NASDAQ:ADSK) trades at 27.5x 2015E EBITDA and 50.1x 2015E EPS with Revenue growth of 16% and EPS growth of -17% from 2014 - 2016E.

Autodesk, Inc. operates as a design software and services company worldwide. Its Platform Solutions and Emerging Business segment offers AutoCAD software, a computer-aided design application for professional design, drafting, detailing, and visualization; and AutoCAD LT, a professional drafting and detailing software.

Under Armour (NYSE:UA) trades at 27.7x 2015E EBITDA and 56.4x 2015E EPS with Revenue growth of 53% and EPS growth of 63% from 2014 - 2016E.

Under Armour, Inc., together with its subsidiaries, develops, markets, and distributes branded performance apparel, footwear, and accessories for men, women, and youth primarily in North America, Europe, the Middle East, Africa, Asia, and Latin America.


These top 5 short ideas represent opportunities to profit from extreme outliers based on their valuation adjusted for growth.

The purpose of the AIQ Model is to identify stocks that are such extreme outliers in their valuation (adjusted for growth) that we expect to see some sort of mean reversion and underperformance in their stock relative to the index.

Investors should perform their own fundamental analysis of companies recommended on this list before making any investment decisions.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.