There are multiple reasons to believe that stocks are overvalued right now, generally speaking, motivating me to move on from some old duds in my portfolio.

For starters, consider the market for initial public offerings (IPOs). Companies usually wait to go public until market conditions heat up. High stock valuations allow IPO companies to raise more money. After below-average IPO years in 2022, 2023, and 2024, this year is shaping up to be above-average for new listings.

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The rise in IPO stocks in 2025 suggests that stock market valuations are high. And this suggestion can be corroborated further. According to YCharts, the price-to-earnings (P/E) ratio for the S&P 500 is 28, well above its 10-year average of 25.

S&P 500 P/E Ratio data by YCharts

Some investors may use this information to "time the market," selling all of their stocks. I believe that's the wrong takeaway -- there's no telling what will happen with the market next. But for me, I have stocks in my portfolio that I'd like to move on from. In my view, now is as good a time as any to sell these, considering the stock market is potentially overvalued.

I recently gave connected-TV platform company Roku (NASDAQ: ROKU) a hard look. I started buying shares in 2020 and continued buying into 2022. My entire position is down about 15% as of this writing, even though the S&P 500 has risen dramatically during my holding period. But I ultimately decided to keep holding for one key reason.

It's early. But so far, I'm happy with my choice. On June 16, Roku secured a deal with Amazon (NASDAQ: AMZN). And it underscores why I still haven't sold Roku stock yet.

Why Roku's potential is sky-high

For eight consecutive quarters, Roku has sold its hardware devices at a gross loss -- it sells them for less than it costs to make them. It does this because it's more interested in taking market share and becoming an advertising-technology (adtech) titan in connected TV (CTV).

When it comes to adtech, TV screens are the most desirable advertising medium, and Roku powers TVs in over 90 million households. Not only is the video format attractive to advertisers, but Roku has an interesting value proposition: It can "close the loop" in advertising.

Over the years, Roku has struck some interesting partnerships with companies such as Kroger, Walmart, and Cox Automotive. Take the Cox Automotive partnership for illustration. It owns the popular Kelley Blue Book platform. Through the partnership, Roku can show marketers how viewers are really responding to vehicle ads. If they see an ad and then head over to Kelley Blue Book for better info, that's an important data point for advertisers.

In this scenario, Roku and Cox Automotive work together to close the loop as much as possible.

Roku's partnerships with Kroger and Walmart can do similar things. Consumer brands could advertise on Roku, know who saw an ad, and know whether they bought anything at Kroger or Walmart as a result. Assuming Roku can demonstrate a high return on advertising spending, demand for its platform should soar, allowing it to command better advertising rates.

Will Roku finally be able to capitalize?

Now Roku is partnering with Amazon, and the potential is similar. Amazon is the largest e-commerce company in the world and perhaps knows more about consumers than any other retailer. This makes Amazon's advertising solutions quite popular and explains how its ads business scaled so quickly.

Through the new partnership, Roku and Amazon hope to deliver a win-win. It's a potential win for Roku because advertisers will have data from Amazon and can better target Roku's viewers. It's a potential win for Amazon also because (in spite of investors' concerns about Amazon's Fire TV) Roku remains the top player in the space.

In short, I believe Roku's partnership with Amazon is big news for investors, and it's exactly the kind of news that's kept me as a shareholder. But allow me to contextualize the news a little more.

Roku's potential has been sky-high, but it has, nevertheless, been a disappointment in recent years.

Roku generated higher average revenue per user (APRU) in 2022 than it did in 2024. And management doesn't even break out this metric anymore, suggesting the numbers are still disappointing. But viewership has increased dramatically. This alone should have lifted ARPU. The only logical explanation is that advertising demand simply hasn't grown as it should, in spite of what Roku's adtech capabilities can theoretically provide.

Roku's partnership with Amazon is expected to officially launch before the end of the year. If the partnership can't materially improve Roku's monetization at some point in 2026, then I don't know what will. Failure to see a substantial improvement with Roku at some point in 2026 could suggest it's finally time to move on from this once-promising stock.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jon Quast has positions in Roku. The Motley Fool has positions in and recommends Amazon, Roku, and Walmart. The Motley Fool recommends Kroger. The Motley Fool has a disclosure policy.

In 2017, home improvement retail chain Floor & Decor Holdings (NYSE: FND) went public. It only had about 70 locations and was still virtually unknown. And investors could have bought it at any time during the past eight years. But now it's time to buy Floor & Decor stock like there's no tomorrow.

Of course, that's just an expression -- there will be a tomorrow for Floor & Decor, and I believe it will be great for shareholders. That's why I believe it's worth the investment today. But when it comes to buying the stock at an attractive price, I don't think that investors should necessarily wait until tomorrow, hoping for any entry point that's better than this.

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The valuation is my third reason to buy Floor & Decor stock today. But first allow me to explain two other reasons why it's a good buy right now.

1. An attractive business model

Before he passed away in 2023, Charlie Munger was renowned for being a great investor and one who was focused on business fundamentals. Therefore, when he praises a business model, it's a big deal. And in one of his final interviews, Munger praised Floor & Decor.

There are two extremes in retail. One approach is to have a lot of little stores -- GameStop fits in this category. It ended 2024 with over 3,200 locations, which is massive. But each location only had just over $1 million in annual sales.

The other approach is to have relatively few stores that handle massive volume, which is Floor & Decor's business model and what Munger loved about it. It follows the same logic as one of his favorite businesses, Costco Wholesale.

Floor & Decor only has around 250 locations today and it only expects to have around 500 long term. But each is between 50,000 square feet and 80,000 square feet. And with $4.5 billion in overall trailing-12-month revenue, these 250 stores are certainly high volume.

High-volume stores can serve Floor & Decor by creating operating leverage, leading to strong profitability. It's something to watch as the business grows.

2. Big plans ahead

As mentioned, Floor & Decor is looking to grow to at least 500 locations in coming years. Here in 2025, it's looking to open 20 new stores, which is about 8% growth. But keep in mind that this growth is slow by this company's standards. Given the economic uncertainty right now, management pulled back on this year's plans.

Ordinarily, shareholders can expect Floor & Decor to open new locations at a faster rate as it expands toward its long-term goal. But opening new stores isn't the only growth strategy. The company owns another business called Spartan Surfaces, which does flooring installations for commercial properties, such as hospitals.

This is a great ancillary business idea for Floor & Decor. Circling back to the business model, there's a ceiling to the opportunity with its retail locations -- it doesn't want a lot of low-volume stores. But it can still leverage its infrastructure with this ancillary commercial business.

Between sales growth, new stores, and newer ideas, I believe that Floor & Decor can double its revenue in the next five years or so. That's a good opportunity for investors.

3. The aforementioned value

It's widely agreed that Home Depot is a great business, but even the most bullish shareholders would have to concede that its growth prospects are somewhat slim. Floor & Decor's growth outlook is much better. And yet, in spite of this, the price-to-sales (P/S) valuation for Home Depot stock is much more expensive.

HD PS Ratio data by YCharts

One might object to my valuation comparison, pointing to Home Depot's superior profit margins, which is true. That said, a growth company such as Floor & Decor shouldn't be expected to be optimized for profits in the same way as a mature business such as Home Depot.

During the pandemic-fueled home improvement spending boom, Floor & Decor had a profit margin of over 8%, which is about what Home Depot's margin is now. Therefore, the company is capable of better -- it's proved it. And even during this period of sluggish flooring sales, it still has a profit margin of about 5%.

In other words, Floor & Decor stock is cheap when looking at its growth prospects. Those who think it should be cheaper because of its lower profit margins might not be seeing the whole picture.

I've long believed Floor & Decor is simple idea and yet a strong multibagger investment opportunity. That hasn't changed. But now that this American stock is trading at one of its cheapest valuations ever, and even at a discount to more mature businesses such as Home Depot, I believe now is the time to buy Floor & Decor stock like there's no tomorrow.

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Jon Quast has positions in Floor & Decor. The Motley Fool has positions in and recommends Costco Wholesale and Home Depot. The Motley Fool has a disclosure policy.

Shares of retail chain Dollar General (NYSE: DG) dropped 45% in 2023 and 44% in 2024 as investors fretted over rising unemployment, macroeconomic uncertainty from tariffs, and the retailer's own plunging profit margins. In January, it hit rock bottom.

Dollar General stock is stunningly up more than 60% since. Investors today are left wondering whether it's still a value play today or whether the value train already left the station.

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As of this writing, Dollar General has earned nearly $1.2 billion in net profits over the last 12 months, and the total value of its stock -- its market cap -- is just north of $25 billion. This means that it trades at almost 22 times its profit. In other words, the price-to-earnings (P/E) ratio is 22.

On one hand, this means that Dollar General stock doesn't look like a value play today. After all, over the last decade, it's traded at an average P/E ratio of less than 20. From this perspective, it's trading at a more expensive valuation than normal.

DG PE Ratio data by YCharts

On the other hand, this chart doesn't tell the entire story. And the rest of the story has me believing that Dollar General is indeed an enticing value play for investors today. Here's why.

Why Dollar General stock is a value play

Generally speaking, stocks go up when earnings per share (EPS) increase. To be sure, one of the easiest ways to grow EPS is with revenue growth. But there are companies that still manage to grow EPS at a nice clip by other means, and this can lead to good stock performance.

This isn't a hard rule. After all, gaming platform Roblox is worth over $60 billion and has never reported positive EPS. But as a general rule, long-term EPS growth matters when it comes to a stock's price.

I'll be clear: I believe that Dollar General is in a great position to materially grow its EPS over the next five years at least. And I believe the stock is a value play today in light of its future profit potential.

Dollar General's profits are under pressure right now. But there are multiple reasons to believe that the pressure is temporary. Allow me to hit the big ones.

First, Dollar General's management misstepped and bought too much inventory back in 2022. This is clearly seen in the chart below -- inventory growth suddenly flew right past revenue growth.

DG Revenue (TTM) data by YCharts

The result of this miscalculation was devastating for Dollar General's profits. Besides merchandise getting damaged and stolen, management also had to lower prices to quickly downsize. And this hurt the company's profits. But now, with inventory returning to more appropriate levels, this headwind should abate, leading the way to better pricing and higher profit margins.

Second, Dollar General's customers have changed their shopping habits recently, which also impacts profits in the near term. About a year ago, management shared that most of its customers are low-income and anticipate missing credit card payments. This meant they were buying more food and less discretionary items.

The problem for Dollar General is that food items tend to have lower profit margins than discretionary items. While it's questionable whether macroeconomic conditions have yet improved since management shared this, it's reasonable to assume that they eventually will. A normalized mix of food items and discretionary purchases could help profit margins improve as well.

There are more reasons to believe that Dollar General's profits will improve over the next five years or more. For example, sales for the company's private label brands are steadily growing, which can have better margins. But suffice it to say that there are multiple drivers for Dollar General's profits in coming years.

1. The chart below shows that Dollar General's profit margin is about half of what its 10-year average is. I'm not necessarily hoping that the company does better than ever. On the contrary, simply returning to normal margins within the next few years would allow profits to double.

DG Profit Margin data by YCharts

Keep in mind that I'm only talking about Dollar General's higher profits due to normalized profit margins. This doesn't account for the incremental profit potential from opening new locations. Moreover, its same-store sales usually increase, leading to more revenue growth.

Dollar General stock is fairly priced today compared to profits that are under pressure. But it's a value play for those who assume that its stores remain relevant, its top line further grows, and its profit margins return to normal.

I personally assume all of those things. This is why Dollar General stock is a value play that I'm still happy to hold in my own stock portfolio today.

Should you invest $1,000 in Dollar General right now?

Before you buy stock in Dollar General, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Dollar General wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you’d have $669,517!* Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $868,615!*

Now, it’s worth noting Stock Advisor’s total average return is 792% — a market-crushing outperformance compared to 171% for the S&P 500. Don’t miss out on the latest top 10 list, available when you join Stock Advisor.

See the 10 stocks »

*Stock Advisor returns as of June 2, 2025

Jon Quast has positions in Dollar General. The Motley Fool has positions in and recommends Roblox. The Motley Fool has a disclosure policy.