The first quarter was a doozy for stocks, with markets beginning 2016 on the worst beginning-of-year losing streak ever. But after some whipsaw gains, the S&P 500 charged back from its February lows and ended March basically breakeven.
The second quarter has been substantially less volatile, but let’s not call this a game just yet.
The past week has seen the return of some market drama, as investors worry about the possibility of a looming Federal Reserve rate hike in June, as well as a possibility of a “Brexit” that would see the U.K. ditch the European Union.
Now that we see some caution returning to markets, it’s a good time to be proactive and scan for investments that could put your portfolio at risk. That means watching out for landmines when checking out stocks to add to your portfolio, as well as doing some pruning.
With that in mind, here are eight stocks to sell that are disgustingly expensive right now; if you’re looking to minimize risk, these names have to go.
Disgustingly Overvalued Stocks to Sell: Netflix (NFLX)
Netflix, Inc. (NFLX) is the quintessential growth stock, and one that Wall Street has been quite fond of over the last few years. In 2012, NFLX stock bottomed below $8 per share (split-adjusted) as the fallout from the ill-conceived Qwikster debacle wreaked havoc on shares.
Since then, Netflix has been on a growth tear, and this year the company is investing heavily in global expansion plans; the company launched in 130 new countries at the beginning of 2016.
Unfortunately, Netflix is severely over-hyped.
Content costs continue to balloon. Some analysts are worried that international growth, despite the spending, could stall soon. Meanwhile, shares trade for 300 times earnings and more than 85 times forward earnings.
Markets have begun to realize their folly, and shares are down more than 30% from their highs above $130 per share in December. Don’t hang around for the next downturn.
Disgustingly Overvalued Stocks to Sell: Mobileye (MBLY)
Mobileye NV (MBLY) is another super-hyped company that is seeing the froth start to come off as investors reconcile expectations with reality.
Mobileye, which makes autonomous driving and machine vision software, went public in 2014 and quickly became a hit with Wall Street. Shares soared to nearly $65 per share by mid-2015, but the numbers to support valuations that high simply aren’t there yet.
Despite losses of 40% from August 2015 highs, MBLY stock trades for 126 times earnings, 33 times sales and 83 times free cash flow.
Could Mobileye one day become an important part of the driverless car economy? Sure. But that’s years away, and in the meantime MBLY will have a tough time supporting your portfolio when markets go “risk off.”
If you want to dive in, wait for a much better price. Discounts will come whenever the markets teeter.
Disgustingly Overvalued Stocks to Sell: Workday (WDAY)
Workday Inc (WDAY) is another fine idea, and another great company, that nonetheless serves as a poor holding right now.
WDAY aims to help businesses save money by moving the HR department to the cloud, and considering that revenue soared from $134 million in fiscal 2012 to $1.16 billion last fiscal year, I’d say the concept is doing just fine.
But just having the term “enterprise software” in your company description doesn’t mean investors should abandon all previously held concepts of financial responsibility.
Workday isn’t yet profitable, and trades at 260 times forward earnings, 12 times sales, and 12 times book. Meanwhile, if you need evidence that WDAY stock is a lousy investment during volatile periods, look no further than the first two months of this year. Workday finished off 2015 around $80 a share, then swiftly cratered to $47.32 at the market’s bottom in February.
Again, WDAY probably has a bright future ahead, but any market jitters will send the stock to the ground. This is another company that you could monitor and buy on big dips.
Disgustingly Overvalued Stocks to Sell: Monster Beverage (MNST)
Monster Beverage Corporation (MNST) shares look frothy by almost any fundamental standards: MNST goes for 53 times earnings, 31 times forward earnings 11.2 times sales and 177 times free cash flow.
The only reason this stock is trading around $150 per share is the company’s sweetheart distribution deal with The Coca-Cola Inc (KO).
And while there’s constant chatter about whether KO should buy out the remaining 83% of MNST — it struck a deal to buy 17% of the energy drink company in 2014 — that can’t happen until summer 2018 due to a covenant in the original agreement.
That covenant can be waived if the boards of both companies agree to such a deal, but considering Coca-Cola’s initial investment valued the company at $12.9 billion, and less than two years later it’s a “worth” a bloated $30 billion, I don’t see an early buyout coming.
In the meanwhile, traders who bought in at the February lows likely will look to lock in their quick profits should things get hairy again.
Disgustingly Overvalued Stocks to Sell: Yelp (YELP)
There’s a widely held misconception that investors can tend to fall victim to: If a stock has fallen really, really far then it surely can’t go much lower, can it?
Yes, indeed it can. Ask Radio Shack, Borders or the thousands of other now-defunct publicly traded companies that have gone down in flames.
Yelp Inc (YELP) isn’t Radio Shack or Borders. But it’s not a profitable company, which is red flag No. 1, and analysts don’t expect it to break into the black in 2016 or 2017 — it will merely pare its losses. Wall Street has punished Yelp accordingly as growth has slowed, and shares have nearly been halved in the past year.
And yet, I wouldn’t put it past shares to fall further.
Yelp has rebounded hotly out of its February lows, up 65% since then. Meanwhile, this is a company that could be usurped by the likes of Alphabet (GOOG, GOOGL) and has no profitability to rely on when the chips are down and the market is selling its more speculative plays.
This isn’t my idea of a savvy buy into likely volatility.
Disgustingly Overvalued Stocks to Sell: Square (SQ)
Square Inc (SQ) is another company that won’t be profitable for years. It’s coming off a really bad first-quarter that saw the mobile payment processing company almost double its losses from the year-ago period. Operating expenses rose 72% while revenue rose 51%.
It doesn’t take a rocket scientist to tell you that trend can’t continue forever.
Another trend that can’t exactly go on till the end of times is Jack Dorsey’s status as a double CEO. He also heads Twitter Inc (TWTR), which, maybe you’ve seen, isn’t doing so hot either.
TWTR stock is down nearly 40% year-to-date while Square shares are off nearly 30%. This is precisely why Dorsey occupied two spots on my January list of 10 CEOs That Could Be Toast Before 2017. He’s two-timing shareholders at both companies, and unsurprisingly, neither is particularly excelling at the moment.
Analysts have no idea when Square will turn profitable, and it has a part-time CEO and expanding losses. Meanwhile, it has no P/E measures because it doesn’t have any E (earnings). The saving grace is that it “only” trades at 2.3 times sales, but that’s thin comfort.
Disgustingly Overvalued Stocks to Sell: Ctrip.com (CTRP)
Who would’ve known that Chinese tech stocks would be prone to a bubble?
While Ctrip.com International, Ltd. (ADR) (CTRP) — an online travel booking website that stands to gain from the growing Chinese middle class — sounds pretty sexy, it’s the sexy stocks that have a tendency to fly too close to the sun.
CTRP stock has some Icarus-like qualities. It changes hands for about 60 times forward earnings and more than 10 times sales, and its price/earnings-to-growth ratio can’t even be computed (because Ctrip is actually expected to lose money this year, and earnings are expected to decline from 2015 levels over the next few years.
With an erratic history of earnings and the added risk factor of the Chinese government, which can wield its influence on a whim, the current share price doesn’t seem to reflect the risks.
Disgustingly Overvalued Stocks to Sell: Shake Shack (SHAK)
Alas, we come to Shake Shack (SHAK), which in good conscience I could not omit from this list.
Shake Shack is a burger joint, folks, not a cloud-based software company that can scale infinitely at a moment’s notice. Yet SHAK stock trades at 103 times earnings and 63 times forward earnings.
The restaurant industry as a whole I consider to be a little over-hyped right now, and Shake Shack is no exception. Although it has come down a long way from its euphoric highs near $97, it still reminds me of Chipotle (CMG), which is itself more than 40% below 52-week highs approaching $760, but now trades for $444.
While (knock on wood) there haven’t been any E. coli outbreaks at Shake Shack, it still seems as if Wall Street is giving the New York-based restaurant — which has its roots in Central Park — a break on valuation.
With revenue growth decelerating, you can expect SHAK stock to cool down as well.
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 firstname.lastname@example.org.