4 Red-Hot Stocks Flying Too Close to the Sun

red-hot stocks - 4 Red-Hot Stocks Flying Too Close to the Sun

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If there is one thing to be gleaned for the big post-earnings selloff in Netflix (NASDAQ:NFLX), it is that stocks can indeed fly too close to the sun.

Interestingly enough, CNBC ran an article a few days prior to Netflix earnings detailing a handful of red-hot stocks that have been so hot in 2018, they’ve already run past their consensus Wall Street year-end price targets. Netflix was one of those stocks.

Fast forward a few days, and not-good-enough earnings caused the red-hot Netflix stock to ice over in a big way. Netflix’s 52-week high is over $420. Now, the stock trades below $380.

Thus, the question becomes: which red-hot stock is next?

I think a few red-hot stocks could follow in Netflix’s footsteps and have sizable corrections over the next several weeks and months.

Here’s a deeper look.

Red-Hot Stocks Flying Too Close to the Sun: Under Armour (UAA)

Under Armour stock
Source: Shutterstock

Current Price: $21.23

Consensus Price Target: $17

Downside: ~20%

Analysis: Athletic apparel brand Under Armour (NYSE:UAA) was once one of the most troubled stories on Wall Street. But, optimism regarding an Under Armour turnaround has picked up in 2018, and UAA stock is up nearly 50% year-to-date.

I think this optimism is misplaced.

There really haven’t been any improvements in the Under Armour growth narrative. North America revenues are still declining at a surprisingly early stage. International revenue growth, although it was 19% last quarter, is cooling at a worrisome rate (international revenues were up 57% in the year ago quarter). Thus, international revenue growth is mirroring the North America revenue growth trajectory of a few years ago, and that implies declines in the foreseeable future.

Meanwhile, gross margins are still declining because Under Armour has diluted its brand to drive sales. Adidas (OTCMKTS:ADDYY) remains red hot. Nike (NYSE:NKE) is hotter than ever. Puma is making a huge push in basketball. Lululemon (NASDAQ:LULU) is dominating the yoga world. And, at the end of the day, there just isn’t much room for Under Armour.

The big problem is UAA stock’s big valuation (120x forward earnings). Considering the growth narrative isn’t triple-digit earnings multiple good, I think the analysts are right on this one. UAA stock isn’t going higher by the end of the year.

Red-Hot Stocks Flying Too Close To The Sun: Twitter (TWTR)

Source: Shutterstock

Current Price: $43.05

Consensus Price Target: $33.70

Downside:~22%

Analysis: Much like Under Armour, Twitter (NYSE:TWTR) has been long viewed as a troubled story on Wall Street. While other digital ad giants like Facebook (NASDAQ:FB) and Google (NASDAQ:GOOG) had been big winners for several years, it wasn’t until this year that Wall Street started giving TWTR stock some love.

Why the shift in sentiment regarding TWTR stock? It is primarily due to the company’s advertising business, which has rebounded in impressive fashion and has gone from declining last year to a more normal 20%-plus revenue growth rate last quarter. This return to growth in the ad business has occurred simultaneous to huge cost-cutting, so the company’s margin profile has improved dramatically. Improved revenue growth and improved margins has led to Twitter consistently recording profits for the first time in company history.

But, the stock has come too far, too fast. TWTR stock now trades at nearly 60x forward earnings for revenue growth that was 21% last quarter. FB and GOOG stock both trade at just 27x forward earnings, and both of those companies reported revenue growth in excess of 21% last quarter.

Thus, TWTR stock’s present valuation is a disconnect with its growth. That implies weakness ahead.

Red-Hot Stocks Flying Too Close To The Sun: Advanced Micro Devices (AMD)

AMD stock

Current Price: $16.50

Consensus Price Target: $15.70

Downside: ~5%

Analysis: Chipmaker Advanced Micro Devices, Inc. (NASDAQ:AMD) has been on fire recently for two big reasons.

First, AMD stock dropped below $10 in April, and $10 has long served as a price support for this stock. Every time AMD stock has dropped to $10 over the past ~2 years, it has rebounded in powerful fashion.

Second, AMD stock dropped to $10 thanks to a confluence of headwinds — tariffs, falling bitcoin prices, and rising rates — none of which had staying power. As such, those headwinds have since moved into the rear-view mirror, and AMD stock has soared to above $15 as investors have become more optimistic regarding this company’s ability to gain server market share in the back-half of 2018.

But, this run will end soon for two big reasons.

First, AMD stock is now above $15, and $15 has long served as a price resistance for this stock. Every time AMD has rallied above $15 over the past ~2 years, it has dropped quickly.

Second, at $16.50, all the company’s upside is more than priced into shares. Assuming 15% revenue growth and robust margin expansion over the next several years, I peg the fair value of AMD stock at right around $15. Thus, at $16.50, AMD stock looks like more risk than reward.

Red-Hot Stocks Flying To Close To The Sun: TripAdvisor (TRIP)

Source: Shutterstock

Current Price: $60.15

Consensus Price Target: $47

Downside: ~22%

Analysis: Much like Under Armour, Twitter, and AMD, TripAdvisor (NASDAQ:TRIP) is a 2018 bounce-back story that has come too far, too fast.

Competitive risks from Airbnb, Amazon (NASDAQ:AMZN) and others killed TRIP stock in 2014. The slaughter continued in 2015, 2016 and 2017. But, 2018 has started off with a different narrative, as the company has released back-to-back strong earnings reports which point to strengthening go-forward fundamentals in the travel sector, which is likely the result of the whole travel pie growing by a ton thanks to the young consumer’s emphasis on travel and experiences.

But, this is still a sub-10% revenue growth and sub-20% earnings growth company. Next to sub-20% earnings growth rates, TRIP stock’s 45x forward earnings multiple seems rather rich. It is also rich next to the company’s five-year average forward earnings multiple of 30.

Consequently, while the fundamentals are improving for TRIP stock, these improvements seem largely priced in after the stock’s year-to-date rally. Gains through the rest of the year will be tough to come by.

As of this writing, Luke Lango was long FB, GOOG, and AMZN. 


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