7 Overvalued Stocks to Sell While You Still Can
InvestorPlace - Stock Market News, Stock Advice & Trading TipsMany stocks that may seem attractive are actually still overvalued. Here are seven stocks to sell before their outlooks dim...
The market has officially entered a correction as investors identify stocks to sell. The S&P 500 has now fallen 10% from its most recent peak, hitting the threshold to put the market into a correction.
And for tech investors, things are looking worse. The Nasdaq is approaching a 20% decline, and certain speculative growth stocks and sectors are down far more than that.
After a decline of this nature, many traders are looking to dip. And, to be sure, there are some great deals out there today. However, there's also a lot of fool's gold to avoid.
Many stocks that may seem attractive – even if they've dropped a lot already – are actually still overvalued. Here are seven stocks to sell before their outlooks dim even further:
- Peloton Interactive (NASDAQ:PTON)
- Teladoc Health (NYSE:TDOC)
- Block (NYSE:SQ)
- Nvidia (NASDAQ:NVDA)
- MicroStrategy (NASDAQ:MSTR)
- Royal Caribbean (NYSE:RCL)
- Boston Beer (NYSE:SAM)
Overvalued Stocks to Sell: Peloton Interactive (PTON)
Peloton had a good ride. And now it's on our list of stocks to sell.
The digital sports equipment maker was one of the pandemic market's biggest winners. With gyms closed and people stuck at home, Peloton had a golden opportunity to introduce consumers to its bikes, treadmills and subscription class program.
And, for a year or so, Peloton seemingly enjoyed tremendous success. The company reported massive top-line growth as it sold a ton of bikes. Demand was so high that there was a huge waiting list for Peloton products. PTON stock kept going up and up.
And then it all ended. In 2021, demand for Peloton products suddenly went into reverse. As the economy reopened, people ended up wanting to spend less time cooped up at home. Things have gotten so bad that Peloton has ended up with a bunch of bikes it can't sell, and thus it temporarily halted production. It's also fired thousands of employees.
Activists are now trying to get the company to sell itself to a larger tech rival. And the company has changed its management team and sharply overhauled its operations to try to reduce its cash burn. Given that Peloton was losing hundreds of millions of dollars even during the pandemic when demand was burning bright, it's hard to see how things get much better from here.
The future for Peloton probably looks a lot like, say, GoPro (NASDAQ:GPRO). That is to say, a once glamorous consumer product whose moment passed and whose stock now lingers in the single digits, unloved and unnoticed. Maybe Peloton gets bought out soon. If not, PTON stock will slowly slide over time as everyone forgets that the fad ever happened in the first place.
Teladoc Health (TDOC)
Like some others on this list of stocks to sell, a bull might complain. How could Teladoc still be overvalued when the stock has already lost 75% of its peak valuation?
Simply put, that valuation has no relation to economic reality. Teladoc is a classic example of a company whose loses have mounted even as its grown. Due to its anemic profit margins and questionable merger with Livongo, Teladoc has struggled to turn top-line revenue growth into a sustainable business.
What's the issue here? Teladoc has no moat in telemedicine. It's easy to create rival services, and insurance companies, health care providers, and even large corporations like Walmart (NYSE:WMT) are doing their own telehealth services. Teladoc can take more market share – in the short-term – by selling its services at a loss. But, at some point, Teladoc may run out of money as investors stop subsidizing its sea of red ink.
It may seem harsh to say with TDOC stock already down this far, but there's drastic downside remaining. I see very little terminal value to this business, given that it has offered next to no evidence that it will ever achieve much profitability. If and when it has to cut marketing expenses and growth expenditure, revenue growth will disappear and investors will see what a mess they've got on their hands. A likely outcome here is that a health care company with a solid balance sheet buys Teladoc for peanuts in a few years.
What do you get if you combine a struggling payments ecosystem, a digital wallet and cryptocurrency brokerage, and the Tidal music service? That's right, you get Square – or rather – Block as it's now known. Fresh off producing minimal shareholder value at Twitter since IPO, CEO Jack Dorsey has now moved his efforts to trying to turn Block around.
So far, the results are less than promising. The company's core Square payments platform never reached significant profitability and sometimes ran contracts at a loss just to show top-line revenue growth. Square's performance – as a payments platform – was poor during the pandemic, showing that even an historic boom in consumer spending wasn't enough to fix that platform's problems.
Block also owns Tidal, which was one of Dorsey's stranger purchases. Tidal remains irrelevant in the broader music streaming market, and seems likely to be written off as a misguided vanity project.
There's also Cash App, which has, I will give it credit, signed up a ton of users. Monetization has been far harder to come by, however, which isn't surprising when Cash App uses marketing such as giving players free credits in youth-focused games such as Animal Crossing. It might be hard to cross-sell mortgages or insurance to your average Animal Crossing player.
Cash App showed a ton of top-line revenue growth through its Bitcoin (BTC-USD) brokerage services. However, this is largely meaningless revenue, as Block counts the whole Bitcoin transaction as revenue even though it only earns a fractional gross margin off said transactions. In any case, with crypto now in a bear market, those empty calorie revenues are set to decline anyway.
As Twitter (NYSE:TWTR) shareholders well know, Dorsey is an unorthodox CEO. At times, he seems unfocused. And, it's not reassuring, to say the least, when he is tweeting about "hyperinflation" and controversial economic theories. That might not be the best person to run a financial services and lending company.
In any case, Block has a whole bunch of businesses, but none of them are particularly good ones. The sum is no greater than the parts, and SQ stock should keep on dropping.
Overvalued Stocks to Sell: Nvidia (NVDA)
I recently laid out the full case for why Nvidia stock has further to fall. Subsequent market events have confirmed that view.
Namely, the company reported what seemed like excellent Q4 results. Despite that, NDVA stock only traded around flat immediately following the news, and by the next day, it was off more than 5%. It's a clear sign that you have major valuation problems when a company sells off meaningfully on an excellent earnings report.
The core problem here is simply that massive price-sales ratio. Up until around 2015, NVDA stock historically traded between 2x and 5x sales. Even in the 2000 dot-com bubble, it got no higher than 13x sales. This time, it hit 30x. That number is just too high; it's virtually impossible for a large mature company like Nvidia to perform well enough to make investors much profit from that starting price.
Even after its recent dip, Nvidia stock is still trading at 22x price-sales and at 60x earnings today. In the long run, I struggle to see the P/S multiple staying above 15, making this one of our stocks to sell.
MicroStrategy is a small software company. In 2021, the company abruptly pivoted from software to becoming a de facto Bitcoin holding company. In some ways, this might have made sense, since MicroStrategy's core software business was struggling to grow, and MSTR stock had dramatically underperformed the NASDAQ index in recent years.
Still, it was a bold move that raised some concerns. MicroStrategy bought more Bitcoin than it could afford to pay for with its cash on hand. As such, MicroStrategy issued a large loan, in dollars, with which to obtain more capital to bet on Bitcoin. MicroStrategy CEO Michael Saylor now frequently goes on social media to preach about the merits of Bitcoin.
He may look like a genius if the price of Bitcoin if the price goes back up. Inherently, however, it's a risky bet. If the price drops too far, MicroStrategy could end up owing more (in dollars) on its loans than its Bitcoin would be worth. The company would be in a state of something approaching insolvency. Also, if decentralized finance keeps taking off, the price of other coins such as Ethereum (ETH-USD) and Solana (SOL-USD) could soar, leaving Bitcoin and thus MSTR stock in the dust.
Given the high volatility in cryptocurrency, MicroStrategy has structured its bets in a way that it could very well go to zero if the price of Bitcoin declines for an extended period. Investors would be well advised to consider other ways to getting exposure to the price of Bitcoin which have less terminal downside risk.
Royal Caribbean (RCL)
Tech stocks are certainly leading the market decliners as of late. However, they're not the only overvalued stocks out there. Royal Caribbean is a great example of how investors have lost sight of valuations when it comes to some travel and economic reopening names.
The first-order analysis on a company like Royal Caribbean is that its stock price is still below where it traded in January 2020. Therefore, it has more room to appreciate going forward. However, investors should look at enterprise value, and not just stock price, when determining then versus now valuations.
Enterprise value incorporates all of a company's issued stock, plus its outstanding debts. Both factors are important. For one, Royal Caribbean issued new shares of the company during 2020 to help fund itself during the bust. As a result, each share of RCL stock today represents a significantly smaller ownership stake than it would have three years ago.
Additionally, Royal Caribbean issued a ton of debt – and at high interest rates to boot – in order to manage its cash flow.
In due time, Royal Caribbean will likely pay down that debt and get its balance sheet back on a more solid footing. In order to do so, however, Royal Caribbean will have to devote cash to paying bankers that, in the past, would have gone to dividends or buying new cruise ships.
Also, don't forget that cruises are still struggling with the pandemic. Omicron has spread quickly on cruise ships in a number of situations. Additionally, much of the cruising demographic is older, and thus still hesitant to travel and potentially expose themselves to the virus.
Long story short, Royal Caribbean will take awhile to get back to pre-Covid earnings, meanwhile, its balance sheet is in much worse shape than it used to be. Shares deserve to be at a big discount to January 2020 prices.
Overvalued Stocks to Sell: Boston Beer Company (SAM)
Boston Beer is a craft brewing company primarily known for its Samuel Adams brand. In addition, Boston Beer is always launching new brands and product categories. Notable winners for the company include Angry Orchard hard ciders, and the Truly hard seltzer.
Truly is where the company's recent problems start. Up until mid-2021, hard seltzer was enjoying what appeared to be exponential growth, and brewers couldn't make the stuff fast enough. Demand suddenly rolled over in late 2021, however, and Boston Beer was unable to adapt in time. The company, in fact, ended up with so much inventory that it ended up destroying some rather than trying to sell it at a heavily discounted price.
Boston Beer's results were so bad that it barely earned a profit at all in 2021, even factoring in its more stable businesses such as Sam Adams. This was a massive miss; analysts had seen the company earning as much as $25 per share last year, and instead it barely broke even. Needless to say, SAM stock plunged from over $1,000 to the $300s now.
Even that might not be low enough. If you look back to Boston Beer's history, it tended to earn around $8 per share annually before it launched Truly. Given how badly seltzer sales have imploded, investors can't safely factor in much earnings from that business anytime soon. Based on a run-rate of the company's other brands, if you put a 30x earnings multiple on SAM stock, you still only get a price target of $240. That's well below today's $368 price.
Sure, Boston Beer might launch another hit product; they've certainly done it before. But until we see signs of that next big trend getting started, it makes our list of stocks to sell because it's really hard to justify owning the stock at today's prices. SAM stock looks like a classic value trap where people underestimate just how far and how long earnings will have declined from peak levels.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a sizable New York City-based hedge fund. You can reach him on Twitter at @irbezek.
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