If you look at the Shiller price-to-earnings ratio for the S&P 500, you’ll find that the stock market is presently at its third most expensive in history. The most overvalued stock market was in 1999-2000 during the dot-com bubble. Second in line is the market just prior to the 1929 crash. At present, the market is just a hair below that level, with a Shiller P/E Ratio of 29.45.
In order to believe that stocks are going to maintain their current prices, you have to believe that S&P 500 earnings are going to rise about 30% this year. Not going to happen.
So if you are looking for momentum stocks to sell short, especially ones that don’t have the fundamentals to support them, look at these seven companies that are most likely to get crushed in the next market crash.
These are the kinds of stocks that I might swing trade in my stock advisory newsletter, The Liberty Portfolio, but I’d never hold them as an investment.
Stocks to Sell Before the Next Crash: Tesla (TSLA)
Tesla Inc (NASDAQ:TSLA) is valued at $53 billion, and has never shown a full-year profit. In fact, after more than doubling revenue from fiscal year 2014 to FY 2016, TSLA losses increased from $294 million to $675 million.
Tesla bought out SolarCity in what has increasingly appeared as a bailout, as there is no synergy whatsoever between these two firms, despite what persistent bulls insist is “the wave of the future.” When the market starts crashing, momentum investors are going to drop TSLA like a Hummer.
The downside here could be gigantic — 50% or more depending on the size of the market correction — because there is no there, there.
Stocks to Sell Before the Next Crash: Netflix (NFLX)
Netflix, Inc. (NASDAQ:NFLX) is producing some really terrific content. It’s also spending like a drunken sailor on shore leave on the island of Themyscira. NFLX stock is burning well over a billion dollars per year in cash, and must continually raise capital to fund the content machine.
Netflix inches along as far as making any actual profit, and it is starting to mature as far as streaming growth is concerned in the US.
In a market crash, the scales will fall from momentum investors’ eyes as they realize that paying 207x earnings for a cash-burning machine is a terrible idea.
Stocks to Sell Before the Next Crash: Snap (SNAP)
Snap Inc (NASDAQ:SNAP) is one of the signs of a frothy market. SNAP is valued at $18 billion. Its revenue for all of 2016? Barely $400 million. Its net loss last year was almost $500 million. The reason people own this stock is because they are hoping for momentum runs as this bubble inflates, or on some ridiculous piece of news that can be overhyped.
This feels so very much like the dot-com bubble, when companies that made no money at all were bid up to crazy valuations. That SNAP went to an IPO at all with these lousy financials tells you the whole story.
Stocks to Sell Before the Next Crash: Amazon (AMZN)
Amazon.com, Inc. (NASDAQ:AMZN) is going to finally see its comeuppance in the marketplace, when a crash happens. The psychology of crashes is interesting, in that rationalizations that seem perfectly logical when things are quiet suddenly blow up. People are saying “Amazon is different,” and it is, to a certain extent.
I’m sure that one day, Amazon will truly be worth its $458 billion market cap, but in the next crash, I believe investors will flee big time.
I also believe it will be one of the first to recover, as its brand name gives it a “flight to quality” character.
Stocks to Sell Before the Next Crash: Facebook (FB)
Facebook Inc (NASDAQ:FB) also sits at an unrealistic market cap of $435 billion, which is about 43x FY 2016 net income. I will say that FB stock isn’t outrageously overvalued because its growth is clicking along, and paying a PEG ratio of 1.2 for a growth stock like this isn’t necessarily overpaying if you have a long-term view.
However, I think Facebook will get cut down to size quite a bit because investors have a habit of second-guessing their holdings when panic hits. However, like AMZN, I think FB will get sold off later in the panic, and bought back earlier in any recovery.
Stocks to Sell Before the Next Crash: Shake Shack (SHAK)
Shake Shack Inc (NYSE:SHAK) will give plenty of investors heartburn in a market crash.
I still don’t understand this story, and that means it’s another example of a frothy market. A burger chain is a commodity. There’s nothing special in their product. There’s tons of competition. The entire company made only $12 million last year yet trades at over 100x net income.
Think of it like this — McDonalds Corporation (NYSE:MCD) made $4.69 billion last year and trades at 21x estimates. If you can show me on what planet SHAK valuation makes sense, I’ll put franchises all over that planet.
Stocks to Sell Before the Next Crash: Twitter (TWTR)
Twitter Inc (NYSE:TWTR) doesn’t stand a chance. In the long run, I’m sure someone will buy it, but for pennies compared to the current valuation. It has been years and TWTR still hasn’t figured out to truly monetize its platform.
It just isn’t a “must have” feature. I think Twitter stock gets dumped by anyone who holds a large position, as they realize that they’ll want to raise cash to move into other, higher-quality stocks that may be on sale. However, unlike AMZN and FB, I don’t think people will rush back into it.
If the crash is big, TWTR will become a distant memory.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he did not hold a position in any of the aforementioned securities. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.