The unique dynamics of 2020 have produced many overvalued stocks. Will this continue into 2021? Back in February-March, when the novel coronavirus started to spread across the globe, stocks tanked on the uncertainty.
Yet, despite the pandemic bringing much of the world’s economy to a halt, stocks in-general quickly rebounded in the months that followed.
Of course, to some extent it’s been a case of the “haves and have-nots.” That is to say, some stocks have posted record results, while some have not benefited from the runaway bull market. Tech names with big tailwinds from the “stay at home economy” have surged to all-time highs. Shares in companies hardest hit by lockdowns and social distancing? Not so much.
Yet, some names have rallied to reward investors, even if their pandemic tailwinds aren’t as strong as their share prices suggest. As a result, there are many richly priced names today that have little to fall back on if investor enthusiasm starts to cool.
So, what are some overvalued stocks that could change course as the new year approaches? Consider the following five names to sell, as all of them could head lower in the coming year:
- Burlington Stores (NYSE:BURL)
- Chipotle Mexican Grill (NYSE:CMG)
- Pinterest (NYSE:PINS)
- Royal Caribbean (NYSE:RCL)
- Wayfair (NYSE:W)
Overvalued Stocks: Burlington Stores (BURL)
Earlier this year, I included Burlington Stores as one of top retail stocks to avoid, due to the pandemic. Sure, my bearishness may have been proven wrong by BURL stock’s strong comeback since March. But, it may be a different story in the months ahead.
What am I talking about? Discount retailers haven’t been as hard hit by the crisis as other bricks-and-mortar retail business. And, this company is expected to rebound from this year’s losses, to positive earnings in fiscal 2022 (ending Jan 2022). But, that’s the same situation with its peers. And both of them may offer more compelling value propositions.
How so? Based on post-pandemic earnings projections, this stock changes hands at a forward P/E of 31.4x. By comparison, rivals Ross Stores (NASDAQ:ROST) and TJX Companies (NYSE:TJX) sport more reasonable post-pandemic forward P/E ratios of 24.7x and 23.3x, respectively.
Also, there’s a long-term concern to keep in mind with Burlington: its lack of an e-commerce presence. On the eve of the outbreak, this company shuttered its online sales platform. Put it all together, and there’s good reason why shares could head lower, even as its underlying fundamentals improve.
Chipotle Mexican Grill (CMG)
Sure, many restaurant stocks have bounced back from the pandemic much sooner than predicted. But, Chipotle stock has not only recovered; it trades far above where it was when the outbreak first made headlines.
CMG stock changes hands today at prices around $1,268 per share. Pre-pandemic, shares traded for around $900 per share. Yes, there is some rationality behind Wall Street’s continued enthusiasm for this stock.
For example, as Piper Sandler analyst Nicole Miller Regan recent put it, the company is pivoting “from recovery to growth mode.” Add in the tailwind from the increase in online food orders, and I concede there’s more sending this stock higher than speculation alone.
Yet, even with this growth potential factored in, this stock’s forward P/E ratio of 113.7x still looks rich. Even if the company hits its ambitious earnings projections (estimated at $21.44 per share in 2021, versus $11.01 per share this year), we could still see its frothy multiple contract in the coming year.
And, if valuation contracts, this hot restaurant name could easily fall back well below $1,000 per share. With this in mind, letting off the gas and selling into strength, may be the best call here.
Yes, it took awhile, but this “also-ran” social media stock has finally reaped the benefits of the “stay at home economy.” After a blowout quarter, and improved guidance, Pinterest stock has surged tremendously in the past few months.
But, after rallying over 275% in the past six months, PIN stock could head lower from here. As InvestorPlace’s Chris Lau discussed on Nov. 4, shares could pullback to between $40 and $50 a piece if bullish buying wanes.
Or, perhaps even lower. As this bearish Seeking Alpha commentator put it last week, at today’s prices, the platform is priced as if it’s on the way to have two-thirds the users of Facebook (NASDAQ:FB). Believing that’s far from possible, he gives shares a $15 per share price target.
My take? I lean more toward Lau’s prediction of a moderate pullback if investor interest starts to cool. Coupled with the potential of vaccine news taking some steam out of “stay at home stocks,” consider today’s price level (around $63 per share) prime time to cash out, ahead of possible declines.
Royal Caribbean (RCL)
After the recent game-changing vaccine news out of Pfizer (NYSE:PFE) and Moderna (NASDAQ:MRNA), many have dived back into hard-hit cruise-line stocks. But, while things may improve from here, that doesn’t mean further gains are in the cards near-term for names like Royal Caribbean stock.
But, although recent guideline changes may mean “no sail orders” may be on the way out, it could be quite some time before it’s full steam ahead for this cruise-line operator. With heavy losses set to continue into 2021, shares could start to head south again once investors digest the recent vaccine developments.
Simply put, this industry isn’t out of the woods just yet. Sure, after its October capital raise, bankruptcy chances remain remote. But, at today’s prices ($75 per share), it may wise to sell into strength.
I know, it seems dangerous to go bearish on e-commerce stocks. Covid-19 vaccine news may have some thinking we are in the final round of the pandemic. But, with cases surging once again, a tough winter could mean the tailwinds continue for this fast-growing sector of the retail economy, including Wayfair.
But, while this means there may be some runway left for e-commerce powerhouses like Amazon (NASDAQ:AMZN) and Shopify (NYSE:SHOP), can the same be said about W stock? It’s questionable. Sure, this online retailer of home furnishings has knocked it out of the park thanks to the pandemic.
Yet, as our own Bret Kenwell discussed Nov. 12, the current valuation of W stock (forward P/E of 119x) is irrational, given projected decline in earnings for the coming year. Covid-19 may have been the catalyst to finally get this company out losses and into profits, but much of its recent results can be chalked up as a “one-and-done event.”
This doesn’t mean Wayfair shares will fall back to their Spring prices (around $100 per share). But, the odds of further declines are more better than a rebound to its 52-week high ($349 per share). In short, cash out now at today’s prices (around $238 per share).
On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.
Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.