Today shares of Seagen have fallen -6.0%, to a price of $128.06. Since it has an average rating of buy, many investors will be using today as an opportunity to buy the dip. But what if the stock is overvalued? Don't blindly trust analyst ratings before looking at the fundamentals yourself!
The first step in determining whether a stock is overvalued is to check its price to book (P/B) ratio. This is perhaps the most basic measure of a company's valuation, which is its market value divided by its book value. Book value refers to the sum of all of the company's tangible assets minus its liabilities -- you can also think of it as the company's liquidation value.
Traditionally, value investors would look for companies with a ratio of less than 1 (meaning that the market value was smaller than the company's book value), but such opportunities are very rare these days. So we tend to look for company's whose valuations are less than their sector and market average. The P/B ratio for Seagen is 6.8, compared to its sector average of 4.07 and the S&P 500's average P/B of 2.95.
Modernly, the most common metric for valuing a company is its Price to Earnings (P/E) ratio. It's simply today's stock price of 128.06 divided by either its trailing or forward earnings, which for Seagen are $3.58 and $0.15 respectively. Based on these values, the company's trailing P/E ratio is 35.7 and its forward P/E ratio is 853.7. By way of comparison, the average P/E ratio of the Healthcare sector is 13.21 and the average P/E ratio of the S&P 500 is 15.97.
If a company is overvalued in terms of its earnings, we also need to check if it has the ability to meet its financial obligations. One way to check this is via the so called Quick Ratio or Acid Test, which is the sum of its current assets, inventory, and prepaid expenses divided by its current liabilities. Seagen's Quick ratio is 3.764, which indicates that that its total liquid assets are sufficient to meets its current liabilities.
Shares of Seagen appear to be overvalued at today's prices — despite the positive outlook from analysts. So be sure to do your own due diligence if you are interested in taking a long position in SGEN.
