3 Top Stocks That Look Overvalued but Are Still No-Brainer Buys

While some stock prices have been beaten-down lately, others are soaring toward historical highs. If you're evaluating some of your favorite stocks right now and think they look overpriced, you're not alone. But price should never be the sole factor guiding your stock-buying decisions, either. In this segment of Backstage Pass, recorded on Nov. 15, Fool contributors Jason Hall, Toby Bordelon, and Rachel Warren each pick a stock that they think could be overvalued, but is still a smart buy for long-term investors. 

Jason Hall: The market's up 357% in total returns over the past 10 years. That's the S&P 500. We're going to talk timely topics. But just a reminder, we're long-term investors. Rachel, you brought this one to me and Toby to talk about. CNBC has a show called Trading Nation. An investment banker was on the show, and he said that Tesla, Nvidia, and Microsoft (MSFT 1.65%) stocks are to quote, "way ahead of themselves," right now, of course, trading is not our stake here.

History has also told us that it's a feature of the stock market: that great stocks will from time-to-time come down from their all-time highs. They get over their skis. All of those terms, they get whatever terminology you want to use. There's always, that happens. But the reality is that trying to time your way in and out of those highs and lows it's just about impossible, especially if you have a regular job. Unless you're a full-time trader and you have time.

It's just really hard to get anything close like timing it right. Most of us just never going to do it right, and then there's tax complications, all that stuff. Let's have a little more fun and let's talk about some of that's probably more useful for our Foolish viewers here. Toby, I'm going to ask you to kick us off. What's the stock that today is overvalued, but that you buy it in a second?

Toby Bordelon: Yeah, I'm going to actually go with one that this dude Mr. [Matt] Maley mentioned [on Trading Nation.]. I'm going with Microsoft.

Jason Hall: I'm loving this.

Toby Bordelon: I got to disagree with him. I disagree on his assessment. Look, is overvalued, it might be slightly overvalued, it might not. I'm honestly not sure I'm willing to give it to you, though, if you want to say it's a little bit overvalued, but it's not way ahead of itself. I think that's a little bit ridiculous. And to put it in the same category as Tesla in terms of valuation to me is just mind-boggling, but enough of that.

This is a $2 trillion company. It's true that I don't think you're going to get 20% annual returns for the next years and definitely on this. But it's a great business. They got a great management team and this is an incredible company for a lot of individuals, lot of consumers, a lot of businesses and it's really one honestly, I do own the stock. it might be a little bit overvalued by some traditional metrics. I'm not convinced that really is. But even so I would still want own there for a long term.

Jason Hall: Rachel what do got for us?

Rachel Warren: Yeah. No, I agree with you Toby. I feel like I've said this before, but I feel like people focused so much on share price and obviously it makes sense. This is how we see in long-term gains in our portfolio apart from dividends. But I think that if you have a really good company with a really great long-term growth story and a really diversified and strong business. I don't mind paying a premium for that. I also think that price is a little bit less important these days in the sense that with fractional investing, you see a really pricey company and it can still be attainable for whatever price you are willing to pay.

I think that's also important to note. The company I'm going to go with here is Airbnb (ABNB 2.77%). I was talking about Airbnb on the show a little earlier this afternoon, the IPO and SPAC show. I just love this company. I've seen a lot of places where investors and analysts are saying the company's overvalued. I think there has been mixed investor sentiments about the company, given the strange environment we're still in with travel recovery and the pandemic being ongoing.

But I think just the incredible rate at which Airbnb had gone from it's pandemic lows and how fast it's business is continuing to grow even while travel experts are saying that travel won't return to pre-pandemic levels for another few years at least. I think that speaks a lot to just the underlying strength of the business. The most-recent quarter that it reported was it highest-ever quarter in terms of revenue and its revenue in the third quarter was actually 36% higher than two years ago, the third quarter of 2019, the company was insanely profitable in the most recent quarter. It's highest ever net income.

Net income was up 280% year-over-year. Again, Airbnb is increasingly seeing growth from people who were staying long-term stays of 28 days or more. That accounted for 20% of the gross nights booked on the platform in this most recent quarter. I think that while the travel industry may still be on shaky ground, I think people are traveling more, but I also think people are booking Airbnb for a variety of reasons whether it's to move to a location that they want to be in for a while or to work remotely or to go on vacation. And I think this company has so much room to grow in the years ahead, and I am really excited to see what that looks like. This is a stock I'm willing to pay a premium for.

Jason Hall: I'm going to share a chart here. This isn't the stock that I'm going to talk about Rachel but you talked about Airbnb. There's a little bit of this company that it makes me think about. I know it might seem like a bit of a reach. Particularly like Airbnb's market cap today. But thinking about where a company is, like here's Starbucks. Starbucks, this is it's P/E ratio, price-to-earnings ratio. It's always been overvalued, like it's always forever been overvalued. Check out this, though. That's total return level [laughs]. As the stock has always been crazy expensive to buy, it just has steadily climbed the wall of worry as that business has grown bigger and more profitable and more cash-generating overtime. I think that really emphasizes, Rachel, your point that sometimes it's worth paying up and I think that's the case.

I'm going to talk about an e-commerce company that I absolutely love, and that is certainly by most metrics, overvalued. It's MercadoLibre (MELI 1.96%), here, ticker M-E-L-I. Trading for about 13 times price to sales. Again you look at that over its history, and that's on the higher end of about average for what it's traded for. You look at it based on a cash-flow basis, and it's very, very, very expensive. But here's the thing. But here's why I would buy this stock in a heartbeat.

Market capitalization of about $81 billion. You cannot convince me that three years from now, five years from now, 10 years from now, MercadoLibre is not still going to be one of those most dominant e-commerce and payments platforms in all of Latin America and it's going to be worth a hell of a lot more than $81 billion. You just can't convince me of that. The economics of that business are incredible. The founder is still the company's CEO, he is still the chairman of the board. I can't remember, Rachel, if you were on the hour I was talking about it. He's not even 50 yet.

Rachel Warren: Wow.

Jason Hall: [laughs] How did the company in 1999 [laughs]. He is like 48, 47, somewhere around there is a little bit older than I am, [laughs] I've read that a couple of days ago and as reading through their 10-K and I'm like that's just bananas to me. You have young dynamic leader understands the markets they're in, understands technology, has a major financial stake. All of the economic tailwinds. I'd buy MercadoLibre every day and twice on Sunday if the markets were open, I'm a big fan right there.