Investors are always on the lookout for a strong company at a great price, but companies with good fundamentals can still be a bad investment if bought at an excessive premium.

To help investors distinguish between the two, we’ve analysed Morningstar data to identify five ASX stocks that are trading well above their Morningstar fair value estimate.

Companies with a price to fair value ratio (P/FV) of greater than 1.0 are considered to be trading at a premium. If the ratio is below 1.0 shares are considered 'undervalued', or trading at a discount to Morningstar’s fair value estimate.

This ratio—along with a company’s uncertainty rating—helps determine Morningstar’s overall star rating for a stock.

1- and 2-star stocks are considered overvalued by Morningstar, while three stars means a stock is considered fairly valued, and 4- and 5-star stocks are considered undervalued.

That doesn't mean these companies are a bad investment. Star ratings are a quick way to tell whether the current price of a stock is a good one, and that is separate from whether the company itself is a good one. 

Star ratings are meant to be used in conjunction with the Morningstar Economic Moat Rating and other fundamental metrics to help you make a decision about investment based on many factors.

5 overvalued ASX stocks


All data is current as of May 5, 2023.

Pro Medicus (PME)

  • Star rating: ★
  • Fair value estimate: $28.50
  • Uncertainty rating: High
  • Economic moat: Narrow

Morningstar’s most overvalued ASX stock remains IT health company Pro Medicus, after making the list in March.

Of the more than 1700 individual stocks ranked by Morningstar analysts globally, Pro Medicus ranks as the most overvalued, with a P/FV ratio of 2.10.

That means the stock’s recent share price of around $60.02 is more than double its fair value estimate of $28.50.

Shares in the company have been climbing in recent months and are up more than 50% since hitting their 52-week low in June last year.

Despite the climb, however, senior equity analyst Shane Ponraj says the growth outlook for the company’s main product— medical imaging platform Visage 7—is facing headwinds going forward.

“Visage 7 has resonated most with US academic hospitals that typically have large endowments and greater interest in advanced visualisations and artificial intelligence.”

“We think these features are largely superfluous outside of the academic hospitals market and expect wider adoption to continue to be slow,” he says.

Ponraj says greater competition may be on the horizon for Pro Medicus.

“We suspect the market is likely underestimating competitive pressures. We think product differentiation is unlikely to be durable, with low barriers to entry and larger competitors already utilising server-side rendering and cloud-native architecture.”

ALS (ALQ)

  • Star rating: ★
  • Fair Value Estimate: $8.40
  • Uncertainty rating: Medium
  • Economic moat: None

Shares in ALS fell 10% during March but have since recovered, and are now sitting up 10% year-to-date.

A global provider of analytical testing and inspection services, ALS’ commodities division provides geochemistry, metallurgy, inspection and other services to the mining industry.

Earlier this year, Morningstar upgraded the company’s fair value estimate by 18%, given what analyst Mark Taylor calls a “more optimistic” view of the minerals sector.

“We take a more optimistic view of the ability of battery minerals growth to counter the decline we expect for some of the other more conventional commodities from recent highs,” he says.

However, despite the improved outlook the strong performance of ALS shares so far this year means the stock remains in 1-star, overvalued territory.

Taylor notes that there are still concerns surrounding the stocks earnings multiples—i.e., the company’s share price compared to its forecast earnings per share going forward.

“Despite our improved outlook for minerals, there is still potential for market disappointment and contraction in the earnings multiples being applied.”

“We see this as a key potential catalyst for share price retreat toward our fair value,” he says.

ALS is trading at a 69% premium to Morningstar’s fair value estimate of $7.10.

Xero (XRO)

  • Star rating: ★★
  • Fair value estimate: $60.00
  • Uncertainty rating: High
  • Economic moat: Narrow

Shares in accounting software provider Xero are up almost 30% since the start of the year, pushing the company's already overvalued share price further away from Morningstar’s fair value estimate. 

That's despite Morningstar raising the fair value estimate for by 11% to a flat $60 per share back in March. 

Analyst Johannes Faul says the fair value bump in March was largely down to cost reduction measures brought in by the company.

“We appreciate Xero's disciplined growth focus and willingness to make tough choices. The COVID-19 pandemic ushered a surge in demand for digital products and services, like Xero's accounting software. And many technology companies hired aggressively, pushing up salaries, and arguably, increasing bloat.”

“With demand normalising, new CEO, Sukhinder Singh Cassidy, has rationally cut costs […] The layoffs are painful, especially for those directly affected. But in the longer term, we believe they will improve the health of the company and help return Xero to a path of efficient growth.”

But while that path may be up ahead, Xero recent share price remains at a 50% premium to Morningstar’s increased fair value estimate of $60.00.

Domain Holdings (DHG)

  • Star rating: ★★
  • Fair Value Estimate: $2.30
  • Uncertainty rating: High
  • Economic moat: Narrow

Shares in online property marketplace Domain were considered fairly valued by Morningstar as recently as December 2022, but a 20% climb since the start of the year has pushed the stock further into over-valuation.

As revealed in its most recent financial report, Domain's business performance has been recently impacted by falling listings as rising interest rates and falling property values keep more sellers on the sidelines.

Analyst Roy Van Keulen says the normalizing listing environment is likely to hit Domain’s higher cost structure harder than competitor REA Group (REA).

“With the housing market normalising during the current period and Domain's cost structure having expanded since the pandemic, Domain has seen rapid operating deleverage,” he says.

“The result supports our assessment that Domain has a structurally weaker and more cyclical network than wide-moat REA Group.”

Shares in Domain are currently trading at around a 40% premium to Morningstar’s fair value estimate of $2.30.

Woolworths Group (WOW)

  • Star rating: ★
  • Fair Value Estimate: $27.00
  • Uncertainty rating: Low
  • Economic moat: Narrow

A new addition to the list this month, well-known supermarket operator Woolworths recently posted another quarter of growing food sales. However, according to Faul, this was largely driven by knock-on effects from higher inflation and that business itself is facing some significant headwinds.

“Shares in Woolworths screen as materially overvalued. Perhaps the market is less concerned about near term earnings headwinds and is willing to accept a lower equity risk premium than us,” he says.

Among those headwinds, Faul notes that rising housing costs are increasingly affecting grocery shopping behavior, drawing more shoppers to cheaper brands at competitor supermarkets.

“The average shopper at Woolworths, like at Coles, is increasingly preferring cheaper private label brands over national brands. Especially the ‘saver-family; segment of Woolworths customers living in suburban catchment areas, who are under pressure from rising housing costs—be it higher mortgage payments or rents.”

“We infer from the pronounced shift to private labels, discounter Aldi is likely taking market share in the current economic environment, with its greater private label penetration,” he says.

“Consumers increasingly shopping at discounter Aldi presents a near-term risk to our estimates, even potentially to our long-term forecast if new Aldi customers remain sticky through the cycle.”

At around $38.80 apiece, shares in Woolworths are trading at a 43% premium to Morningstar’s fair value estimate.