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

With Pro Medicus, Xero and Woolworths continue to rank atop among Morningstar’s most overvalued ASX stocks this month, we’ve delved a little deeper to find some more stocks trading well above analysts’ expectations.

To collate the list, all companies in Morningstar’s ASX coverage universe are ranked by comparing there recent trading levels against Morningstar’s assessed fair value estimate for the given stock.

Shares trading at a significant premium to Morningstar’s fair value estimate are considered “overvalued”, while shares are trading well below their fair value estimate are considered “undervalued”.

This ratio—along with a company’s uncertainty rating—helps determine Morningstar’s overall star rating for a stock. The star rating provides a margin of safety for investors.

One- and two-star stocks are considered overvalued by Morningstar, while three stars means a stock is considered fairly valued, and four- and five-star stocks are considered undervalued.

By highlighting the overvalued stocks on this list, we hope to identify companies that could represent a significant price risk for investors at their current trading levels.

All data is current as of June 27, 2023.

4 ASX stocks to avoid at current prices

Fortescue Metals Group (FMG)

  • Star rating: ★★
  • Fair value estimate: $15.00
  • Uncertainty rating: High
  • Economic moat: None

Shares in WA-based resources blue-chip Fortescue Metals Group have been firmly stuck in “overvalued” territory for more than 18 months, after only briefly slipping in to the three-star, “fairly-valued” bracket back in October 2021.

Morningstar analyst Jon Mills says the current market premium is likely down to still-high iron ore prices, which have remained elevated despite recent declines, as well as enthusiasm around the company’s bold green energy ambitions.

“However, in our view it is too early to get excited about green energy, with commercially viable options not yet proven,” he says.

“We continue to forecast sales of about 190 million metric tons in fiscal 2023, a modest 1% improvement on fiscal 2022. With construction of its new Iron Bridge mine nearing completion, we expect continued volume growth from 2024, primarily driven by Iron Bridge ramping up to full production of around 22 million metric tons per year, likely in 2024 or 2025.”

Looking ahead, Mills notes that demand from steelmakers for Fortescue’s iron ore, which is generally lower grade than its peers, has been on the move.

“Discounts tend to shrink when steelmaking margins contract, as has happened. Then steel mills act to minimise costs by using cheaper lower-grade iron ore, rather than maximising steel volumes by using higher-grade iron ore when steelmaking margins are high. Iron ore prices have moderated recently on worries over the stability of the world's financial system and a potential recession,” he says.

Shares in Fortescue Metals Group last traded at a 45% premium to Morningstar’s assessed fair value estimate of $15.00 apiece.

Netwealth Group (NWL)

  • Star rating: ★
  • Fair Value Estimate: $9.60
  • Uncertainty rating: High
  • Economic moat: None

Shares in financial tech and services firm Netwealth have modulated dramatically over the last six months, but to-date have risen nearly 10% since the start of the year.

Despite the recent market rally behind the company—which operates a suite of superannuation, investment solutions and managed accounts businesses—at current prices analyst Shaun Ler says shares are “hot to handle”.

“We believe Netwealth's shares are already overvalued compared with our unchanged $9.60 fair value estimate,” he says.

“The market appears to be pricing in a blue-sky scenario of faster share gains, stable fee margins and rapid expansion in operating margins.”

That said, Ler does note a strong medium-term outlook for the company, which has continued to attract net inflows and gain market in recent quarters, despite depressed investor sentiment.

“We expect this trend to continue over the medium term, underpinned by its competitive fees and ongoing product enhancements,” he says.

“However, We also forecast operating margins to average lower at 49% per year over the five years to fiscal 2027, below its five-year average of 52%.”

Ler attributes the lower longer-term outlook to several factors, including compression in account fees and interest margins, due to competition in the sector continuing to intensify.
Shares in Netweath Group last traded at a 38% premium to Morningstar’s fair value estimate.

Technology One (TNE)

  • Star rating: ★
  • Fair value estimate: $11.20
  • Uncertainty rating: Medium
  • Economic moat: Narrow

Technology One, Australia's largest enterprise software company, joins fellow tech company Xero as one of the most overvalued sector stocks in Morningstar’s coverage universe. A sustained rally beginning late last year has propelled shares up almost 50% in around 9 months, pushing the company deeper into overvalued territory, based on Morningstar’s fair value estimate of $11.20.

Despite posting record profits in its recent first-half results, which was connected to the company’s recent move towards a cloud-based software-as-a-service offering, Morningstar has held firm on its fair value estimate for the company.

“At the current market price of nearly $16.00 [as of May 23, 2023], we consider shares to be overvalued, trading at roughly a 40% premium to our fair value estimate,” said Mathew Hodge, Morningstar Australia’s director of equity research.
Putting aside the share price premium, Hodge notes that the company’s sticky customer base and balance sheet remain strong.

“The general stickiness of customers highlights their switching costs, underpinning our narrow economic moat rating for Technology One. The move to cloud-based SaaS contracts should further strengthen Technology One's competitive advantage through the deployment of additional capabilities and the opportunity to more easily upsell complementary software modules,” he says.

“The firm's balance sheet remains strong. Technology One is targeting the development of a platform that is significantly easier to implement and use, and which has the potential to take business from competitors' customers and bolster spending with existing customers,” Hodge adds.

Since posting its first-half report in late May, shares in Technology One have moderated slightly to now be trading at around a 37% premium to Morningstar’s fair value estimate.

BlueScope Steel (BSL)

  • Star rating: ★★
    • Fair Value Estimate: $15.00
  • Uncertainty rating: Very High
  • Economic moat: None

Shares in steel producer BlueScope have charted a tumultuous climb so far this year, rising more than 20% since the start of January.

In its most recent fiscal half-year results, the company upgraded its 2023 earnings guidance by 43%, which was primarily attributed to improved steel prices and hot rolled coil spreads in the US.

“We view the second-half 2023 earnings upgrade as a positive, which, in our view, de-risks the second-half dividend and potentially the first-half dividend of fiscal 2024, given BlueScope's net cash position reported at the first-half result,” he says.

Despite the strong half-year results, Morningstar has maintained its fair value estimate of $15.00.

“Our expectation for steel prices and hot rolled coil spreads to revert to historical norms remains. This is the key driver behind our longer-term earnings forecast and valuation,” he says.

“We also see downside risks in steel spreads in 2024, driven by structural changes occurring in the Chinese economy around a weaker real estate market and an anticipated slowdown in construction activity across the United States and Australia.”

At $20.45 apiece, shares in Blue Steel are trading at around a 36% premium to Morningstar’s assessed fair value.