10 High-Risk Stocks to Avoid

These stocks earn Morningstar’s lowest rating today and carry significant price risk.

Susan Dziubinski 14 March, 2023 | 4:38AM
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Investors face many different types of financial risk. There’s the most basic risk—the risk of losing money. And then there’s the risk of missing your goals or, for retirees, the risk of outliving your assets. Investors who invest conservatively run the risk of not keeping up with inflation, while bond investors face interest rate and, if investing in lower-quality bonds, default risk. Investing internationally can involve currency and country risk. And particular sectors face their own sets of risks, too.

Today we’re looking at individual stocks that carry significant price risk, which means they’re trading well above Morningstar’s fair value estimate of their worth. Specifically, we screened for stocks that earn a Morningstar Rating for stocks of just 1 star. We think these are high risk stocks today.

High-Risk Stocks to Avoid Today

These stocks all earn 1-star Morningstar Ratings and carry the highest price/fair value ratios among the stocks Morningstar covers as of Feb. 24, 2023.

1) Mettler-Toledo International MTD

2) Old Dominion Freight Line ODFL

3) Dick’s Sporting Goods DKS

4) Cintas CTAS

5) Church & Dwight CHD

6) Idexx Laboratories IDXX

7) Progressive PGR

8) Watsco WSO

9) Hershey HSY

10) W.W. Grainger GWW

Most of the names on this list are good companies. To wit: Seven of the companies on the list maintain solid competitive advantages (or what we’d call economic moats). Five of the companies are run by top managers who have a history of adeptly allocating capital and who thereby receive the highest Morningstar Capital Allocation Rating. And perhaps most notable, two of the companies whose stocks are on our high-risk list are also among Morningstar’s Best Companies to Own, a list that features businesses scoring well on several quality-related Morningstar metrics.

What’s the investment lesson? A great company isn’t always a great stock to buy today; in fact, it can be a downright lousy stock to buy if it’s overvalued and doesn’t provide the buyer with a sufficient margin of safety.

Here’s a little bit about some of the companies on our high-risk stocks list. All data is as of Feb. 24, 2023.

 

Mettler-Toledo International

  • Price/Fair Value: 1.72
  • Fair Value Uncertainty: Medium
  • Morningstar Economic Moat Rating: Narrow
  • Morningstar Capital Allocation Rating: Exemplary
  • Industry: Diagnostics & Research

Mettler-Toledo International stock is the highest risk stock on our list, trading 72% above our US$830 fair value estimate. The company is the global market leader in laboratory and industrial scales and has carved out a narrow economic moat thanks to its market leadership, quality products, and low rates of customer churn, notes Morningstar senior analyst Julie Utterback. The company carries a sound balance sheet and generates strong cash flow, and management has made smart investment decisions that have improved efficiencies. While there’s a lot to like about the company, its shares are extremely overvalued.

 

Church & Dwight

  • Price/Fair Value: 1.44
  • Fair Value Uncertainty: Medium
  • Morningstar Economic Moat Rating: None
  • Morningstar Capital Allocation Rating: Standard
  • Industry: Household & Personal Products

Brands beneath the Church & Dwight umbrella include Arm & Hammer (which offers products in the laundry products, oral care, deodorant, and nasal care categories, among others) as well as Xtra, First Response, Orajel, and WaterPik, among others. We think the company lacks the scale, resources, and negotiating prowess of larger household and personal care competitors and therefore assign the company a no-moat rating, explains sector director Erin Lash. Plus, the company faces what she calls “unrelenting macro and competitive pressures” along with cost headwinds. Church & Dwight stock is 44% overvalued relative to our US$58 fair value estimate.

 

Idexx Laboratories

  • Price/Fair Value: 1.44
  • Fair Value Uncertainty: Medium
  • Morningstar Economic Moat Rating: Narrow
  • Morningstar Capital Allocation Rating: Exemplary
  • Industry: Diagnostics & Research

Idexx Laboratories is the only stock on the list with a narrow economic moat and a positive moat trends, suggesting that the company’s competitive advantages are increasing. The company primarily manufactures diagnostic products, equipment, and services for pets and livestock and is poised to benefit from two key trends, says Morningstar senior analyst Debbie Wang: the continued increase in pet ownership and owners’ willingness to spend more on their animals. Management has made a number of smart acquisitions and maintains a solid balance sheet, though we take issue with its practice of repurchasing shares even as the stock is overvalued. And overvalued, it is: Idexx Laboratories stock trades 44% above our US$326 fair value estimate.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Church & Dwight Co Inc104.17 USD0.41Rating
Cintas Corp721.76 USD0.82Rating
Dick's Sporting Goods Inc221.65 USD5.48Rating
IDEXX Laboratories Inc492.74 USD1.02Rating
Mettler-Toledo International Inc1,359.21 USD0.08Rating
Old Dominion Freight Line Inc Ordinary Shares190.22 USD1.85Rating
Progressive Corp213.30 USD0.70Rating
The Hershey Co188.94 USD1.15Rating
W.W. Grainger Inc918.46 USD1.59Rating

About Author

Susan Dziubinski

Susan Dziubinski  Susan Dziubinski is director of content for Morningstar.com.

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