With volatility’s sudden return to the markets over the past month, investors are re-examining their portfolios with a cautious eye.
Initially, as U.S. stocks sold off due to a fear that China’s problems would seep into American markets, selling was indiscriminate. Even the highest-quality stocks, like Johnson & Johnson (JNJ), slumped nearly 10% in a matter of days.
Other stocks, however, were indeed dramatically overvalued. And despite the correction, there are still plenty of high-flying stocks with suspect valuations out there. Investors should continue to examine their portfolios with this in mind, and if any of these five stocks are among your holdings … well, consider yourself warned.
Without further ado, here’s the list of five overvalued stocks you should sell immediately.
5 Crazy Overvalued Stocks to Sell Immediately: Etsy (ETSY)
Market Capitalization: $1.6 billion
Etsy (ETSY) is an online marketplace with a niche focus on handmade and craft goods, and shares of the company went public in April. As we find with many IPOs, the Etsy public offering saw a little too much euphoria for its own good.
ETSY stock went public at $16 per share, but rocketed 88% higher on its first day of trading, closing above $30 per share. Since then, the stock has gotten a severe reality check, and shares now trade below its IPO price, in the $14 to $15 range.
Alas, there’s still room for Etsy to fall. It trades at a ridiculous 350 times forward earnings (there are no trailing earnings) and goes for about seven times sales. Aside from its lofty valuation, Etsy faces risk of having its reputation damaged, as Americans for Tax Fairness has challenged the company’s “B Corporation” status — given to socially responsible companies — due to what it alleges is a corporate structure aimed at avoiding taxes.
5 Crazy Overvalued Stocks to Sell Immediately: Zynga (ZNGA)
Market Capitalization: $2.3 billion
The next overvalued stock to shed from your portfolio also went public at a ridiculous valuation. Game developer Zynga (ZNGA) went public in 2011 at $10 per share, a valuation of around $7 billion.
It’s been all downhill from there. Shares approached $15 a pop in early 2012, only to plunge below $3 in a matter of months. Since then, shares have languished, and for good reason. At the time of its public offering, Zynga’s hit product was Farmville, the game that gained popularity pretty much exclusively through Facebook (FB).
At the end of the day, Zynga was just never able to match the success of Farmville. Go figure … faddish mobile games aren’t much of a sustainable business! Currently, the company is even facing a lawsuit alleging that the company hid sluggish user engagement figures from investors leading up to its IPO.
With ZNGA trading at 61 times forward earnings, I wouldn’t want to waste money in this stock.
5 Crazy Overvalued Stocks to Sell Immediately: Shake Shack (SHAK)
Market Capitalization: $2 billion
Burger joint Shake Shack (SHAK) also looks more than a little frothy at a forward P/E of 170. I understand that the place makes a mean burger and shake, but it’s tough to see how that justifies such an absurd premium to the market. Consider that the average stock in the S&P 500 trades at a forward P/E of just 16.4, and the overvaluation becomes clear.
Perhaps SHAK gets so much love because Wall Street is just a stone’s throw away from the famed Central Park Shake Shack location.
Either way, Shake Shack shares were already overvalued when they went public at $21 per share in late January. One particularly revealing statistic is the valuation of Shake Shack on a per-store basis. As of last month, the company had just 63 locations, but boasted a valuation above $2 billion, meaning each location was being valued around $30 million — around 10 times the per-store value of most competitors.
5 Crazy Overvalued Stocks to Sell Immediately: Netflix (NFLX)
Market Capitalization: $42 billion
Netflix (NFLX) stock has been around Wall Street a little longer than the prior three companies, but it has still managed to remain overvalued despite its tenure.
Bulls might argue that NFLX is in the same league as Amazon (AMZN), deserving a lofty valuation because of its incredible growth potential. I would disagree. Amazon has the ability to stop investing in loss-leading activities like diapers and same-day delivery, cranking up its profitability instantaneously.
Not so with Netflix. The rapid growth in its share price has been due almost entirely to breakneck subscriber gains. Profits are minimal, and cash flows are still negative — a trend that may actually become the long-term status quo if NFLX keeps spending wildly on content costs. All things considered, it’s hard to justify a forward P/E of more than 300.
Major hedge fund managers are also changing their tone on Netflix, with Carl Icahn exiting his famously profitable NFLX position earlier this year and David Einhorn bashing the stock in a recent letter to investors.
5 Crazy Overvalued Stocks to Sell Immediately: Autodesk (ADSK)
Market Capitalization: $10.5 billion
The last overvalued stock to sell now: Autodesk (ADSK), the design software and services company.
It seems the market has been catching on to Autodesk’s overzealous valuation this year, with shares down 23% year-to-date. Some of the decline came on the recent quarterly report, in which the company reported less-than-flattering revenue and sluggish guidance.
Sales were down 4% year-over-year to $609.5 million, whiffing on the $612.4 million consensus. And the full-year earnings outlook between 60 cents and 72 cents also came in well below the 76-cent consensus estimate.
Shares currently trade for about 300 times next year’s projected earnings, making this stock one of the more quantitatively expensive companies with a valuation north of $10 billion.
As of this writing, John Divine held Sep 18 2015 NFLX $102 put options. You can follow him on Twitter at @divinebizkid or email him at firstname.lastname@example.org.