Did you know the stock market is presently at its third most expensive in history? The most expensive was the dotcom bubble of 1999-2000. The next most expensive was right before the 1929 crash.
That’s not to say that market is going to crash tomorrow. It may never crash. But the way of the world is that things revert to the mean, and right now, stocks are 30% overvalued compared to the long-term mean.
So when the market does revert to the mean, what are the stock to sell before that happens? What are the stocks to sell now because they are overvalued to the point of being ridiculous?
I have seven thoughts on the matter, and I hope to be short these stocks when the chickens come home to roost.
Stocks to Sell in a Market Crash: Netflix (NFLX)
Netflix, Inc. (NASDAQ:NFLX) is trading at a market cap of almost $65 billion.
Think about this for a moment. A stock that has $337 million in trailing-12-month net income trades at about 40% of the market cap of Walt Disney Co (NYSE:DIS), which has $9.2 billion in TTM net income.
NFLX stock had negative operating cash flow of $1.6 billion in the TTM. NFLX borrows money, throws it into original programming and doesn’t make back what it spends. The stock is held up entirely by momentum investors and institutions who can’t afford not to be in it.
In the next market crash, watch NFLX fall twice as much or more than the overall market.
Stocks to Sell in a Market Crash: Tesla (TSLA)
Tesla Inc (NASDAQ:TSLA) is a stock I would truly describe as a joke on investors, and it is right at the top of my list of stocks to sell.
The entire concept of electric vehicles was built on the premise that they are cleaner for the environment, and that’s a big load of nonsense. Sure, they are terrific cars, but Tesla will have to manufacture and sell a nearly impossible number to justify its $59 billion market cap.
That, by the way, comes on a TTM loss of $720 million and negative free cash flow of almost $2 billion. Tesla has never made money in any fiscal year.
The most bullish scenario assumes perfect execution and no competition. In the next market crash, investors will realize that TSLA is another momentum play, and I say it will lose as much as 60% of its value.
Stocks to Sell in a Market Crash: Shake Shack (SHAK)
Shake Shack Inc (NYSE:SHAK) does absolutely nothing special. It makes burgers. So while venerable burger chains themselves trade at slightly unreasonable valuations, SHAK stock trades at a market cap of $1.3 billion on $13.3 million of net income.
Wait. What? SHAK trades at 100x TTM net income?
Okay, well maybe earning are growing at an astonishing rate? Nope. 23% growth annualized over the next five years, according to analysts. So when the market craters, one of the many stocks to sell will be SHAK stock, as it should be trimmed back to at least a PEG ratio of 2, or a 60% decline from here.
The company is barely even free-cash-flow positive, so it seems like this company is priced for perfection … when pigs fly.
Stocks to Sell in a Market Crash: Procter & Gamble (PG)
Procter & Gamble Co (NYSE:PG) is widely regarded as a “blue chip stock,” which is also thought of as being a “safe” stock. That’s all well and good, but that’s because nobody is looking at PG stock very carefully.
You would think that $15 billion in TTM net income would be something to cheer about, but not when it has a $225 billion market cap, or a P/E ratio of 16. That’s particularly true when organic net income growth is, at best, 6% year over year.
I think that when the next crash comes, investors who have money parked in these “safe” stocks will suddenly realize just how overvalued they are, and not return.
Stocks to Sell in a Market Crash: General Electric (GE)
General Electric Company (NYSE:GE) is going to provide another wake-up call for investors who purchased the stock and forgot about it because — hey — it’s GE.
A 3.5% yield is not terribly attractive when preferred stocks can deliver twice that.
General Electric has been floundering as a company for many years, under the stale guidance of ossified management. The company is falling into disrepair, and trading at 28x earnings on organic growth that is flopping around is a ridiculous price to pay. I think investors will sell out as a new definition of “flight to quality” will emerge, forcing GE stock to shake itself up internally.
Stocks to Sell in a Market Crash: Amazon.com (AMZN)
Amazon.com, Inc (NASDAQ:AMZN) is all the rage these days, and with good reason. The company has visionary leadership and plenty of cash and cash flow to do just about whatever it wants.
However, in a true market crash, I think investors of all stripes will decide that AMZN doesn’t have the net income it needs to justify its stock price.
However, unlike the other companies on this list, which I don’t think will come back from a big fall, AMZN stock probably will. It will be late to sell off, but will do so — and hard — but will also be one of the first to bounce back. So if you’ve been waiting for a chance to get in, that might be the time.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he owns DIS. 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.