The stock market has been easy pickings for investors of late as the major indices have set new all-time high after new all-time high. But things change quickly — just ask any trader caught in February’s grueling move to the downside.
And there are hints that the market might be ready to do just that. Some of the world’s top investors — including George Soros, David Tepper and Jeffrey Gundlach — are turning bearish.
The S&P 500 is downright expensive at a price-to-earnings ratio of 25. Plus, other catalysts could shake the markets — Federal Reserve tightening, or nervousness over the looming presidential election, could hold back consumers and businesses hold back.
Don’t be greedy. If you’re like a lot of investors, you’re sitting on strong gains on a number of your holdings. Now’s the time to start examining your portfolio for stocks to sell before your profits begin to erode.
And if you have a little bit of risk tolerance, now could be the right time to make a few bearish plays to hedge yourself and make a little money on the downside.
The following are seven stocks that look ripe for the selling for a number of reasons, whether it’s stretched valuations, overbought charts or fundamental weakness starting to peek through.
Stocks to Sell: Chipotle Mexican Grill (CMG)
Chipotle Mexican Grill, Inc. (NYSE:CMG) was a can’t-miss way to make money, and not too long ago. But E. coli and salmonella outbreaks will take a little wind out of a restaurant’s sails.
Chipotle is having enormous difficulty recovering, in part because the pervasiveness and power of social media is making it tougher for companies to repair their reputations. This is a company whose motto is “food with integrity.” How about that for brand dissonance?
The financial impact for Chipotle has been brutal. Same-store sales plunged a horrendous 24% last quarter. If you’re looking for a bright spot, that was better than the previous quarter’s 30% plunge.
CMG has taken measures to get customers back — such as the new Chiptopia loyalty program that will last throughout September. The company also is discussing rolling out a new chorizo product. Heck, Chipotle is even trying to roll out burger joints.
But what Chipotle needs — and what investors and customers alike need to see — is an effort to improve the quality of operations.
CMG stock is off by nearly half over the past year, and yet it’s still an expensive play at some 57 times earnings. By comparison, Jack in the Box Inc. (NASDAQ:JACK) trades at a 30 P/E, and Chuy’s Holdings Inc. (NASDAQ:CHUY) trades at 33.
Short selling now accounts for nearly 20% of the float. Put Chipotle on your list of stocks to sell or short.
Stocks to Sell: Staples (SPLS)
Staples, Inc. (NASDAQ:SPLS) is one of the many retail victims of Amazon.com, Inc. (NASDAQ:AMZN). The office supply chain did make a bold move to fight back with a proposed merger with rival Office Depot Inc (NASDAQ:ODP) that would have consolidated the market and helped both companies realize substantial cost savings.
But the Federal Trade Commission had other ideas.
The merger attempt was a defensive move, which shouldn’t encourage investors. Staples’ financials tell the story. Q1 sales from existing stores dropped 4%. Even when including results from Staples.com, comps were off 3%. While Staples actually does have an enormous e-commerce operation, growth remains illusive.
There’s one bright spot that can help keep a small floor on shares, and that’s the attractive 5%-plus dividend. But as sales languish and profits decline, SPLS will have a tough time justifying this robust payout.
Going forward, there are few catalysts to move the stock forward. In fact, with Staples closing 50 North American stores in 2016, it’s clear the direction is backward.
Stocks to Sell: Zynga (ZNGA)
Zynga Inc (NASDAQ:ZNGA) is a social gaming pioneer that originally made hay through a savvy bet on the Facebook Inc (NASDAQ:FB) platform.
But when the mobile revolution gained traction, ZNGA failed to make the transition. The company has since suffered consistent declines in its user base, including a second quarter that saw average monthly users tumble 26% to 61 million. Even more worrisome: The mobile user base has been falling, with a 23% drop in average monthly users.
Those declines have scored a direct hit on Zynga’s top and bottom lines. In the most recent quarter, sales were off 9% to just $182 million, and the company bled $4.45 million in red ink.
But Zynga’s biggest problem is that shared by any mobile gamemaker. Even if ZNGA generates another hit game, it’s unlikely to lead to sustainable gains for shareholders — just a quick pop. The awful reality of the mobile games industry is that hot titles can quickly fizzle out, leaving gamemakers scrambling to replace it with yet another hit idea. And that’s difficult for even the experts to get right.
Zynga has had a nice bounce-back from the February lows, but it’s time to get out.
Stocks to Sell: Netflix (NFLX)
Netflix, Inc. (NASDAQ:NFLX) made a roughly three-year run that saw shares surge 1,500% from mid-2012 through late 2015. Eight months later, and shares have regressed rapidly, off more than a quarter.
The bears don’t look tired, either, putting Netflix on any list of stocks to sell right now.
Subscriber growth is showing signs of deceleration. In fact, the most recent quarter showed Netflix’s slowest ramp in three years. The U.S. saw a mere 160,000 new subscribers, with 1.52 million people signing up internationally. Both were far, far short of Wall Street’s expectations for half a million in America and 2 million across the rest of the world.
Higher prices were a major factor, which suggests a cap on just how much NFLX can wring out of its base.
Options are another. Consumers have an increasing slew of interesting choices, from the likes of Time Warner Inc (NYSE:TWX), AMZN, CBS Corporation (NYSE:CBS) and Dish Network (NASDAQ:DISH).
Yet Hulu may be the biggest threat. Hulu is a joint venture involving Time Warner, Walt Disney Co (NYSE:DIS), Comcast Corporation (NASDAQ:CMCSA) and Twenty-First Century Fox Inc (NASDAQ:FOXA). It also has recently gone to a pure subscription model, and it gives users access to a set of strong content assets including ESPN, CNN, Marvel and Pixar.
Producer Dana Brunetti — the mastermind behind the NFLX hit show House of Cards — recognizes the company’s serious competitive threats and even thinks the stock is overvalued. He also noted that other online operators such as Snapchat could be a threat.
If Netflix user growth continues to be soft, the triple-digit forward P/E — and NFLX stock — will go down.
Stocks to Sell: Fitbit (FIT)
Fitbit Inc (NYSE:FIT) — a top player in the wearables market — actually has a few things going for it. Revenues last quarter jumped by 46% to $586 million, and the company recorded a profit of 12 cents per share. Fitbit sold about 5.7 million units, more than half of which came from Fitbit Blaze and Alta sales.
But investors should watch out.
The competitive environment is heating up, attracting the likes of Samsung (OTCMKTS:SSNLF), Apple Inc. (NASDAQ:AAPL) and Under Armour Inc (NYSE:UA).
Fitbit also has a product roadmap issue. It looks like Fitbit could enter the upcoming holiday season with no new products — just iterations of its existing line. That would certainly put a dent in the company’s revenue growth. Consider that last year, 38% of Fitbit’s sales came during the fourth quarter.
Device companies simply can’t whiff when it comes to the holiday season. Just look at GoPro Inc (NASDAQ:GPRO), which plunged by 50% from November 2015 through February of this year because its product offerings fell flat during this pivotal time.
Fitbit isn’t a lost cause, but it’s certainly among stocks to sell or short for right now.
Stocks to Sell: Whole Foods Market (WFM)
Whole Foods Market, Inc. (NASDAQ:WFM) is an example of the power of reinventing a category that’s essentially a commodity business: You get to charge premium prices.
At least for a little bit.
The strategy is coming apart. Whole Foods actually did too good a job, validating the healthy and organic market to the point where traditional grocers like The Kroger Co (NYSE:KR) and big-box companies such as Wal-Mart Stores, Inc. (NYSE:WMT) Started paying attention.
Whole Foods has suffered a slowdown on the top line. In the latest quarter, comparable-store sales fell by 2.6%. Compare that to 2012, when Whole Foods was growing comps by 8.8%.
Just take it from Whole Foods co-CEO Walter Robb:
“It’s very, very competitive out there right now.”
Then there was this zinger from co-CEO John Mackey:
“So people may not be driving as frequently as far as they used to, because they can stop by a Kroger or an HEB or a Wegmans to get products that they can use to only be able to get Whole Foods.”
WFM has taken typical measures like lowering prices, offering promotions and even creating a loyalty program. But this really just means more pressure on margins.
Even with the drop in WFM stock, shares aren’t cheap. Whole Foods trades at 21X. Meanwhile, Kroger trades at 15X and hot-running Walmart still only trades at 16X.
So more downside could be in the cards for WFM, especially as the growth continues to sputter.
Stocks to Sell: Hewlett Packard Enterprise (HPE)
Hewlett Packard Enterprise Co (NYSE:HPE) operates a variety of solid businesses including servers, storage, networking and cloud infrastructure. It also has taken major steps to streamline operations, including spinning off its IT services division to Computer Sciences Corporation (NYSE:CSC).
Still, HPE — which really is just the result of a long string of acquisitions — is having trouble meshing everything together. The result is a top line that has flatlined. The Enterprise Group is growing at a decent clip (7% in the latest quarter), but Enterprise Services, Software and Financial Services aren’t enjoying the same success.
Ongoing financial engineering (in terms of acquisitions and spinoffs) likely is making it tough for employees to get a sense of overall strategy, and it’s probably not doing much to ensure anyone of job security, either. Don’t discount the difficulty of working under these kinds of conditions.
Meanwhile, HPE faces a host of deep-pocketed rivals including Microsoft Corporation (NASDAQ:MSFT), Dell and International Business Machines Corp. (NYSE:IBM).
HPE stock has nonetheless staged a 45% rally, but shares are getting frothy, and that’s a problem for a company that’s hardly growing.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.