Theoretically, we’re in the most bullish time of year. Investors are supposed to be hunting down stocks to buy to participate in the usual year-end rally.
However, not every stock is positioned well for more bullishness in the fourth quarter. Indeed, several very hot stocks are well overbought and ripe for a pullback.
With that in mind, here’s a closer look at eight hot stocks that you should sell sooner than later — names that have already reached their most plausible value (and then some), and are going to have a tough time moving any higher regardless of which direction the market tide points next.
In no particular order …
Hot Stocks to Sell: Activision Blizzard (ATVI)
While Q4 is generally a good one for all stocks, for video game makers like Activision Blizzard (ATVI), it can be an outstanding one. Investors are keenly aware that video game sales tend to swell during the holiday shopping period — particularly if there’s a must-have game on the market around that time.
This seasonal strength often includes ATVI too. But 2015’s fourth quarter may prove to be an exception to this norm, as Activision Blizzard shares have little to no room left for upside after their 70% gain year-to-date, and the fact that ATVI just hit a new all-time high last Friday.
Yes, the company’s games Call of Duty: Black Ops and Guitar Hero Live are two of the season’s aforementioned must-have games. That tentative demand, however, appears to have already done it’s bullish work.
At this point, ATVI is one of a few overly hot stocks to sell simply because it’s already dangerously priced to perfection.
Hot Stocks to Sell: Pandora Media Inc (P)
In the grand scheme of things, the 45% rebound that Pandora Media (P) has dished out since mid-June doesn’t seem like much considering that the stock is still down 50% from its early-2014 peak — a peak that set up what was a 66% pullback before the selling stabilized three months ago.
Besides, the rally was spurred by a better-than-expected fiscal Q2, which suggested the company’s business model could finally be getting traction.
But even still well under that peak level, Pandora shares are still categorized as one of a few hot stocks to sell soon, as their price around $20 remains very tough to justify.
Reality: While the recent $450 million acquisition of Ticketfly and the not-entirely recent acquisition of music analytics outfit Next Big Sound are promising developments, Pandora Media is entering unfamiliar territory at a fairly frothy price. The upside of these deals is already priced into the stock.
Hot Stocks to Sell: Nvidia Corporation (NVDA)
There’s nothing inherently flawed with Nvidia Corporation (NVDA). In fact, the computer graphics-processor maker is holding up impressively well in the current era of extreme competitiveness in the PC, laptop and tablet world.
NVDA, however, should be considered one of a few stocks to sell now, as the stock’s price and the company’s results have simply become too different; the latter doesn’t quite justify the former any longer after a 38% run-up since the end of last year, and the 35% advance since August alone (telling us the rally wasn’t just a mere rebound move).
In defense of the company, the placement (finally!) of high-end desktop gaming hardware on laptops could prove that there’s a much bigger market for Nvidia’s chipsets than first imagined; making advanced graphics the norm on tablets may not be far behind either despite the recent embarrassment of needing to recall a few million Shield tablets.
But with a forward-looking price-to-earnings ratio of 24, there’s just a little too much time between now and that day to keep the stock propped up that whole time.
Hot Stocks to Sell: SolarWinds (SWI)
Kudos to SolarWinds (SWI) for looking at what it’s calling “strategic alternatives” in an effort to secure its long-term survival. And congratulations to SWI shareholders, who have seen their stock jump more than 15% over the past week-and-a-half on the heels of this news — and more recently, on news that private equity firms Thoma Bravo, Hellman & Friedman and Vista Equity Partners were all interested in acquiring the networking software company.
But if that’s such good news, why is SWI topping a list of stocks to sell now?
Because, proverbially speaking, the best possible news is already fully realized by the market — investors have already priced in a SolarWinds buyout at a plausible buyout price.
Hot Stocks to Sell: Zillow Group (Z, ZG)
News that Zillow Group (Z, ZG) and Trulia were teaming up earlier this year was well-received. And even after it officially happened, the market was cheering — ZG shares are up more than 30% since the two stocks become one back in August, and were up as much as 35% at one point in the meantime.
Even with the pullback since the peak from a couple of weeks ago, though, Zillow Group is overvalued and due for a dip.
Problem: Forget the lack of earnings for the time being, and just consider the fact that the stock trades at a whopping 12 times its trailing sales (versus a market average of about 2.3). It means that when and if Zillow Group ever does manage to turn a profit, even the best-case scenario rate of profit margins still doesn’t leave any real room for bigger valuations.
And don’t forget there’s a massive supply of ZG stock out there now following the all-stock purchase of Trulia that was funded with newly issued shares. It hasn’t mattered much yet, but a lot of new shareholders (former Trulia investors) may be getting an itch to cash out while prices remain at attractive levels.
In other words, ZG ranks as one of a few stocks to sell at this time, even if the overall market is just now starting to pick up bullish steam.
Hot Stocks to Sell: Maxim Integrated Products (MXIM)
Yes, Maxim Integrated Products (MXIM) jumped 15% last week in the wake of news that it would possibly be merging with Analog Devices (ADI) in an effort to achieve greater scale and overcome the headwind that the semiconductor industry is facing at this time. It’s probably a good move, too.
However, the proverbial cat is out of the bag — the bulk of any merger-driven upside is already factored in. In fact, MXIM could be considered one of the market’s priority stocks to sell simply because the only apparent reason for the recent rally was the potential union with ADI.
Should the deal not materialize, there’s a good chance the recent run-up will be undone as quickly as it took shape.
On the flip side, while Maxim Integrated Products may not be worth any more than its current price near $40 right now, it should be noted that if the deal with Analog Devices doesn’t pan out and the stock peels back to its pre-news prices, MXIM is a surprisingly attractive dividend play as well as a growth stock. Even after its big 15% advance over the course of the past week, the dividend yield is a healthy 3.1%, and the company pays it religiously.
Hot Stocks to Sell: Tyler Technologies (TYL)
Up 55% year-to-date, Tyler Technologies (TYL) isn’t necessarily the hottest of the 2015’s hot stocks. But all things considered for the software and systems designer, it’s a very solid showing; government-focused technology rarely see their stocks do so well.
And yet, TYL should be deemed one of a handful of stocks to sell ASAP, as the new all-time high reached on Friday not only tops off a very strained recent rally effort, but the daily bar itself was a doji-shaped bar, suggesting a pivot out of the uptrend and into a downtrend was apt to soon take shape.
The valuation picture doesn’t help either. Thanks to this year’s big gains, TYL is now trading at a trailing P/E of roughly 90 and a forward-looking P/E of 51. The market is cheering the recent $670 million purchase of New World Systems … a cash-and-stock deal that will add 56 cents worth of profit to 2016’s bottom line (versus a projected per-share profit of $2.56 for 2015).
But that acquisition will eat up a huge chunk of the company’s current cash — possibly creating something of a cash crunch — and if issuing stock is going to be the preferred means of doing deals in the future, current shareholders may be facing a little more dilution in the future than they care to.
Hot Stocks to Sell: Wayfair (W)
When Wayfair (W) debuted as a publicly traded company just a little less than a year ago, the fanfare was compelling, and the expectations were bullish … hence the stock’s 54% advance since it offered at $29 per share in early October 2014. And truth be told, results haven’t been bad. While the company isn’t profitable and won’t likely be any time soon, sales have been growing firmly for a couple of years now.
And yet, W is one of a handful of recently hot stocks to sell as soon as possible for one key reason — the class action lawsuits are piling up, claiming the company’s management overinflated the e-commerce outfits prospects, downplayed its risks, and in one case, didn’t explicitly name Overstock.com (OSTK) as a competitor.
The pending lawsuits have little to no merit, and most of the time the suits of this ilk end up going nowhere. But they look bad, and they make it easy for the market to pull the rug out from underneath the stock. Between this perception issue and the fact that Wayfair is still miles away from turning a profit, the 30%-plus gain over the past month means there’s a little too much vulnerability here to mess with.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
