3 Overbought Blue Chips With More Room to Fall

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Stocks were hammered last week as China’s market meltdown sparked fears of overvaluation in U.S. stocks. Then on Friday, the Dow Jones shed 531 points for a 3.1% loss, it’s largest single-day defeat in years.

3 Overbought Blue Chips With Plenty More Room to FallBy Monday, the Dow Jones was briefly off more than 1,000 points before bargain buyers swooped in and bid the index back up to a mere 588 point loss.

China’s weak economic growth has been making headlines for months now, and U.S. investors are punishing stocks, like Apple (AAPL), that have a large or growing presence in Asia. However, this pullback isn’t just hitting stocks with business in China — it’s hitting the high-priced growth stocks, too.

And Tuesday’s turnaround turned out to be a false start.

As Wall Street slowly becomes hip to the wild premiums it was paying for not-so-wildly expanding companies, I expect the selloff to worsen for three blue-chip stocks in particular: Starbucks (SBUX), Under Armour (UA) and Monster (MNST).

Here’s why:

3 Blue Chip Stocks That Will Plunge Further: Starbucks (SBUX)

3 Blue Chip Stocks That Will Plunge Further: Starbucks (SBUX)Starbucks (SBUX), for those of you living inside of a rock underneath a larger rock, is a chain of coffee shops.

Starbucks is wildly successful, extremely pervasive, culturally cemented, but it’s still just … well … a coffee shop. Those still going long on SBUX stock at 28 times forward earnings seem to be forgetting that.

I don’t care if Starbucks uses real pumpkin in their pumpkin spice lattes — under no circumstances does SBUX deserve to trade at a higher forward multiple than breakneck growth stocks like Ambarella (AMBA), which goes for around 25 times forward earnings.

Put the growth metrics of each company side to side to see how absurd this is:

Sales Growth This Fiscal Year (Expected):

  • Ambarella: 48.8%
  • Starbucks: 16.4%

Sales Growth This Next Year (Expected):

  • Ambarella: 21.7%
  • Starbucks: 11.7%

It won’t take long for the market’s “risk-off” attitude to hit Starbucks stock. And when it hits, it’s gonna hit hard.

(For what it’s worth: CEO Howard Schultz’s inexplicable letter to Starbucks employees, asking that staff be super nice to customers freaking out about the stock market, shows that the company may have some anxiety surrounding its own valuation.)

3 Blue Chip Stocks That Will Plunge Further: Under Armour (UA)

3 Blue Chip Stocks That Will Plunge Further: Under Armour (UA)Of the three blue-chip stocks on this list, Under Armour faces the most severe overvaluation risks, in my opinion.

When UA stock reached its all-time high just before the market’s correction, shareholders were sitting on gains in the neighborhood of 44% in 2015 alone. Did Under Armour suddenly start making software or something? Discover a cancer cure? Get acquired by Nike (NKE)? No, no and no.

Instead, Under Armour stock’s rally has been driven by a rapid boost in investor sentiment, especially as two of its athletes, 22-year-old golfer Jordan Spieth and 27-year-old NBA player Stephen Curry, enjoyed breakout years.

Notably, Spieth won the U.S. Open this year, becoming the youngest player to do so in 92 years. Curry won his first NBA MVP award, and led the Golden State Warriors to their first NBA Championship in 40 years.

That’s great press for Under Armour, but it doesn’t translate directly into immediate dollars. Sales of Under Armour’s Curry One — the Golden State guard’s first shoe of his own — have done well, but we have no idea how durable that franchise will be.

Although Under Armour is definitely gaining market share and is expected to grow sales at a robust 20% plus clip for the next few years, that doesn’t mean the stock is worth 95 times earnings, a fact that should sink in with investors soon.

3 Blue Chip Stocks That Will Plunge Further: Monster Beverage (MNST)

3 Blue Chip Stocks That Will Plunge Further: Monster Beverage (MNST)Finally, shares of Monster Beverage are due for a monster pullback in the coming months. Not only does the stock trade at a forward price-to-earnings ratio of 34 and a trailing P/E of 50, but its price/earnings-growth ratio sits at a lousy 2.1.

The somewhat obscure PEG ratio is calculated by taking a stock’s price-to-earnings ratio and dividing it by expected future earnings growth rates. If the PEG ratio is higher than 1, it typically means the stock is a little pricey.

When MNST stock hit its all-time highs earlier this month, the stock was sitting on 44% gains in 2015. I can understand the enthusiasm — Monster Beverage is a great company, and with Coca-Cola (KO) as both a major investor and, as of last year, the company’s preferred global distributor, MNST is bound to keep growing.

Plus, by specializing in energy drinks, Monster has targeted one of the few verticals in the beverage category, outside of water and juices, that are actually growing.

But sales growth is expected to be pretty ho-hum in the next few years (12% this year and 16% in 2016), and the low barrier to entry worries me. As an investor, I’m also not too stoked in the public’s perception of energy drinks, which are frequently associated with causing health and heart problems.

It’s been a good run for MNST stock, but I don’t expect another 44% rally for a long, long time. Avoid this stock if you’re looking to de-risk your portfolio.

As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/08/ua-sbux-mnst-blue-chips/.

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