One of the interesting things about the bull market of the past few years is how few investors really believe in it. Everyone thinks a crash is coming for one reason or another.
Concerns about U.S. equity valuations persist, even with major indices near or at all-time highs. Investors and observers worry that stock valuations are inflated by artificially low interest rates. Risks are being discounted too lightly or flat-out ignored. The U.S. economy isn’t that strong — at least not strong enough to support ever-increasing valuations in U.S. equities.
Overall, the stock market has shrugged off those concerns and climbed the “wall of worry,” as the old saw goes. But the overall market does look stretched at this point. A number of hot stocks look due for at least a correction, if not an outright plunge … and they’ll probably get it over the next few months.
For investors looking to guard against disaster, here are 10 hot stocks that are likely to pull back by 20% or more. These have all shot up like rockets over the past year, with most of them boasting huge 2017 gains. If you’re holding onto them, it’s time to take some of those profits … or if you’re a longer-term investor, start hedging.
Hot Stocks That Could Crash 20% or More: Tesla (TSLA)
YTD Return: 44%
But if ever there was a stock that looked due for a correction, it’s TSLA stock. Its market cap now exceeds that of Ford Motor Company (NYSE:F) and General Motors Company (NYSE:GM). Even a 20% correction would only knock the stock down toward around $250, where TSLA traded as recently as March. And I’d have to believe the bulls would welcome the opportunity to add to their position at a lower price.
Again, long-term, Tesla may be a revolutionary company, and TSLA stock may be a steal. But it’s hard to imagine that any modest rattling in the broad markets won’t be felt in Tesla shares. Growth stocks generally don’t go up forever, or even all the time. A correction in seems due, and it might even be a good thing, longer-term.
Either way, it does seem like Tesla is due for a pullback — at some point.
Hot Stocks That Could Crash 20% or More: Wayfair (W)
YTD Return: 83%
Wayfair Inc (NYSE:W) has become a battleground stock, and the shorts took a big loss earlier this month. Wayfair stock gained 21% after a first-quarter earnings beat, burning traders who were short roughly 30% of the float.
I actually thought W stock was a candidate for a short squeeze, but even I didn’t see a 60% gain coming in just two months!
After those gains, it’s not hard to see the next round going in the shorts’ favor. Wayfair now is worth $5.5 billion, and unprofitable even on an adjusted EBITDA basis. Well-known short seller Andrew Left — who called the plunge at Valeant Pharmaceuticals Intl Inc (NYSE:VRX), among others — has reiterated his bear case. Left points to potential competition from Amazon.com, Inc. (NASDAQ:AMZN) as a significant stumbling block for W stock. And the track record of retailers (online or offline) going up against Amazon is pretty dismal.
Wayfair stock may still have room to run, and it might be an acquisition target itself. Wal-Mart Stores Inc (NYSE:WMT) has been floated as a potential buyer. But at the current valuation, W shares need to take a long, deep rest.
Hot Stocks That Could Crash 20% or More: Momo (MOMO)
YTD Return: 109%
A number of Chinese stocks declined after Donald Trump’s surprise win, including social networking play Momo Inc (ADR) (NASDAQ:MOMO). MOMO shares dropped from $25 to $17 in a matter of weeks. But since then, the stock has lived up to its ticker: a pure momentum play.
MOMO has gained 150% just since mid-December. Impressive Q4 revenue growth of 524% has boosted optimism toward the stock. But there are a few fears, including …
- The roll-out of live-streaming video has driven the increased sales, which could be problematic longer-term. The Chinese government continues to focus intently on the space, raising regulatory risk.
- Competitors including YY Inc (ADR) (NASDAQ:YY) and Tencent Holdings Ltd (OTCMKTS:TCEHY) are fighting for market share as well.
- YY stock, notably, is far cheaper than MOMO, which now trades at a double-digit multiple to trailing revenue. That’s a high multiple, even as quickly as that revenue is growing.
Clearly, the market is much more confident about Chinese stocks in general — see also the recent gains in Alibaba Group Holding Ltd (NYSE:BABA), as well as Macau-facing casino stocks. Fears of a Trump-driven trade war have subsided, too.
But China’s economy still has plenty of risk, and so does MOMO stock.
Hot Stocks That Could Crash 20% or More: Weibo (WB)
YTD Return: 85%
Weibo Corp (ADR) (NASDAQ:WB) is another player among China’s hot stocks, in this case soaring after a strong Q1 earnings report last month. A thin float likely contributed to a short squeeze, which no doubt amplified post-earnings gains. WB stock gained 25% after earnings, and trades near an all-time high.
Like MOMO, the gains look like they may be a bit too much. Our own Dana Blankenhorn asked if gains at Weibo, Momo and other Chinese Internet stocks might be a sign of a bubble. Weibo is often called the Chinese version of Twitter Inc (NYSE:TWTR), and as Blankenhorn pointed out, its market capitalization is now higher than that of Twitter.
To be fair, Twitter has struggled with execution and growth — struggles Weibo doesn’t have at the moment. But WB stock now trades around 16x 2017 revenue estimates, which is a multiple well above that of TWTR. That multiple leaves little room for error, or any reversal in investor confidence.
Hot Stocks That Could Crash 20% or More: LendingTree (TREE)
YTD Return: +56%
LendingTree Inc (NASDAQ:TREE) admittedly is performing well as a business, but its stock seems to have outpaced its gains. TREE shares have doubled since late October, with the stock now trading at 18 times the midpoint of 2017 adjusted EBITDA guidance.
That’s a big multiple given that there are clear risks to the LendingTree model.
The company has had some success expanding beyond mortgages, but it’s also benefiting from lower mortgage originations, which increase lender competition and thus demand for its leads. Margins haven’t moved that much over time — they’re guided to increase only modestly in 2017 despite 30%-35% revenue growth — which raises a serious question as to how much earnings growth the company reliably can generate going forward, once top-line growth inevitably slows.
Again, this isn’t a bad company, necessarily, and it has carved out an interesting niche in the often-risky lending space. But TREE stock looks like a classic case of “too far, too fast,” and losses are losses no matter why they come.
Hot Stocks That Could Crash 20% or More: Universal Display Corporation (OLED)
YTD Return: 102%
Shares of Universal Display Corporation (NASDAQ:OLED) have doubled since the beginning of the year, and tripled from late 2015 lows. And to be fair, there’s clear reason for strength in OLED stock. The company’s OLED material is seeing increasing use, and its technology is widely speculated to be part of the next Apple Inc. (NASDAQ:AAPL) iPhone. A huge Q1 earnings beat spiked OLED stock, which hit an all-time high of $118 before pulling back modestly.
It sure looks like the gains might have been too far, too fast, however.
The exposure to Apple adds sales and diversifies the customer base, given that roughly 85% of revenue currently comes from Samsung and LG Display Co. Ltd. (ADR) (NYSE:LPL), according to an analyst report. That’s good news.
But OLED now trades at 18x the midpoint of 2017 sales guidance. To be sure, revenue is guided up as much as 40% year-over-year. But Universal Display also grew sales just 4%, total, over the past two years. It still hasn’t proven it can be a consistent grower.
Meanwhile, competition will no doubt come, and smartphone growth overall remains rather tepid. (That’s one key reason why Apple traded relatively cheaply until a big YTD run.) There’s reason for optimism toward OLEDs, and Universal Display — as Will Ashworth puts out there — but even that optimism might be priced in, and then some.
Hot Stocks That Could Crash 20% or More: Ollie’s Bargain Outlet (OLLI)
YTD Return: +44%
In this market, any retail stock that doesn’t go straight down looks like a winner. That makes the 42% YTD gains in Ollie’s Bargain Outlet Holdings, Inc. (NASDAQ:OLLI) stock all the more impressive.
To be fair, off-price has been the one area of brick-and-mortar retail that has held up. Burlington Stores Inc (NYSE:BURL) has better than doubled off early 2016 lows. TJX Companies Inc (NYSE:TJX) and Ross Stores, Inc. (NASDAQ:ROST) have held their valuations, though TJX actually is down modestly over the past year.
But even those off-price leaders have seen a haircut of late, driven in part by what the market perceived as disappointing results from TJX. Ollie’s has shrugged those worries off, and now trades at 35x this year’s analyst consensus earnings.
That’s a dangerous multiple for an offline retailer in this environment, and seems to set OLLI up for a pullback, even if its earnings growth continues.
Hot Stocks That Could Crash 20% or More: Vocera Communications (VCRA)
YTD Return: 43%
Not all that long ago, Vocera Communications Inc (NYSE:VCRA) looked like a busted IPO. The provider of communications solutions primarily for hospitals and other healthcare facilities saw minimal revenue growth, including a concerning decline in 2014 sales.
But business picked up last year, and through a strong first quarter. As a result, VCRA stock has soared, better than doubling off early 2016 lows and gaining nearly 40% so far this year.
It might be a bit much.
Sales are growing, but VCRA remains barely profitable. Adjusted EBITDA is guided to just $5-$10 million this year. Competition is intense, particularly from cloud players looking to displace the company’s communication badges.
At more than 4xthe midpoint of 2017 revenue guidance plus cash, and ~80x-plus EBITDA, VCRA’s valuation looks awfully stretched. This stock could see a correction even if growth continues apace.
Hot Stocks That Could Crash 20% or More: Upland Software (UPLD)
YTD Return: 153%
Upland Software Inc (NASDAQ:UPLD), a cloud-based enterprise work management software provider, is an interesting small-cap play.
It looks like growth is rather solid: revenue is guided to increase 19% year-over-year, and adjusted EBITDA is projected to double after tripling last year. As a result, UPLD stock has soared, tripling from November levels and rising nearly 150% so far in 2017.
The concern is that the increases are coming from a series of acquisitions. Organic revenue growth actually declined over the last two years. That doesn’t necessarily mean Upland’s strategy won’t work — but a tripling of a thinly traded stock might imply some investors aren’t entirely in tune with the story.
Upland admittedly isn’t as expensive, as the recent gains would suggest. But investors might be projecting more growth than the company can create on its own. And that could lead to disappointment — or at least a question as to why investors are valuing UPLD’s acquired companies higher than the private markets did.
Hot Stocks That Could Crash 20% or More: J&J Snack Foods (JJSF)
YTD Return: -1%
J&J Snack Foods Corp (NASDAQ:JJSF) is the last of our hot stocks that might crash, and it’s the only one that is sitting on losses this year. However, it’s up 25% over the past 52 weeks, and while it’s plateauing through 2017, it could be on the verge of a much more worrisome move.
J&J Snack Foods is a solid snack food manufacturer, best known for its SuperPretzel and ICEE products. Revenue and earnings have grown consistently, even though closures of Kmart — owned by Sears Holdings Corp (NASDAQ:SHLD) — and Target Corporation (NYSE:TGT) stores and snack bars have impacted sales.
J&J has a solid balance sheet, good management and market share leadership in a number of areas. But the stock also trades at 32x trailing earnings. That’s a huge multiple even in what looks like an increasingly overvalued food space. Given the J&J isn’t growing that much — revenue is increasing 2%-4% annually — and given risks to sugary and salty snacks like slushies and pretzels, that’s a valuation that looks simply far too high.
If the market — or the sector — pulls back, JJSF has room to see that multiple compress substantially, leading the stock down 20% or more.
As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.