Pegging overvalued stocks in this market hasn’t been easy. If anything, stocks that look expensive seem to get more expensive, while their ‘cheap’ counterparts continue to decline.
Even a cursory look at the biggest winners of recent years highlights the trend. The likes of Shopify (NYSE:SHOP), Tesla (NASDAQ:TSLA), and Amazon (NASDAQ:AMZN) all have been repeatedly derided as too expensive, and occasionally as proof of a market bubble. All three, and many others like them, have continued to soar so far in 2020.
But of late, there are signs that the “rich get richer” nature of the market is starting to change. All three of those stocks have declined over the past month. ‘Pandemic winners’ like Zoom Video Communications (NASDAQ:ZM) and DocuSign (NASDAQ:DOCU) too have retreated.
Meanwhile, we’ve seen rallies, particularly since last week’s elections, in hard-hit sectors like retail and even energy. It’s probably too early to confirm that the long-awaited rotation from growth to value is at hand, but at the least some of the market’s seemingly overvalued stocks are starting to struggle.
If that turns out to be the case, there could be more declines across the market. These eight stocks seem at particular risk.
- Beyond Meat (NASDAQ:BYND)
- XPeng (NYSE:XPEV)
- Wrap Technologies (NASDAQ:WRTC)
- Lemonade (NYSE:LMND)
- GSX Techedu (NYSE:GSX)
- Roku (NASDAQ:ROKU)
- Plug Power (NASDAQ:PLUG)
- Upwork (NASDAQ:UPWK)
All look potentially overvalued at the moment. And potential catalysts augur even more selling pressure. For investors looking to avoid overvalued stocks at the moment, these are eight names to sell:
Overvalued Stocks: Beyond Meat
It might seem too late to suggest that investors sell BYND stock. Soft earnings sent the stock down 17% last Tuesday. BYND fell 35% from last month’s highs.
But those declines seem merited. Last month’s highs followed a quick and steep rally; BYND stock in fact trades back where it did at the beginning of September.
Meanwhile, the reaction to earnings appears logical. Headline numbers missed expectations badly. In particular, foodservice sales look disappointing. And while the novel coronavirus pandemic is a factor, it alone can’t justify a 41% decline during a quarter in which restaurants began to reopen and fast-food customers saw relatively stable sales.
Add to that lingering questions about whether Beyond Meat is actually supplying the new plant-based patty from McDonald’s (NYSE:MCD), and it’s not hard to see why investors are selling. With BYND stock still trading at 200x next year’s earnings on the back of a growth story that is showing some cracks, that selling may well continue.
The electric vehicle sector seems full of overvalued stocks. Bears have questioned the valuations of Tesla and its Chinese peer Nio (NYSE:NIO). A number of suppliers like battery play QuantumScape and Velodyne Lidar (NASDAQ:VLDR) have gone public through SPAC (special purpose acquisition company) mergers, and investors generally snapped up those SPACs almost instantly.
Of late, however, the nonstop buying in EV names has faded somewhat. VLDR has dropped by more than half, and Kensington Capital (NYSE:KCAC), which is merging with QuantumScape, is off 45%. Even TSLA stock has pulled back 17% since the end of August.
Yet in recent days, XPEV stock has bucked the trend. Starting Nov. 2, the stock rallied 85% in four sessions. Strong October delivery numbers for the Chinese automaker seemed like the catalyst, though it’s hard to see a single month justifying that kind of rally. The apparent win of Joe Biden in the U.S. presidential election could be seen as another driver, but that win was expected by most investors.
After a modest lull, XPEV soared again, this time gaining 33% after a blowout earnings report.
Yet this still is a company — and, again, an auto manufacturer — with a market capitalization of $34 billion on the back of roughly $550 million in trailing twelve-month sales. Gross margin was seen as a huge positive in Q3 because it actually was positive. XPeng still lost $169 million on $293 million in revenue.
There’s a real story here, certainly. But this seems like a rally that desperately needs a breather and may not have much more in the way of good news to sustain itself.
WRTC stock already is heading in the wrong direction, with a decline of over 50% since mid-July. Even after the pullback, the stock hardly looks cheap. Trailing twelve-month revenue is less than $3 million, book value is $1.30 per share, and positive earnings aren’t likely until 2022 at the earliest.
The news could get worse. No doubt some investors bought the stock this summer amid civil unrest in the U.S., betting that police departments would buy the company’s BolaWrap product to manage protests and avoid the use of lethal force. Many expected the election to result in more protests and riots, and thus more sales. Fortunately, all seems quiet at the moment.
Meanwhile, a short-seller disclosed that a key pilot program with the Los Angeles Police Department showed disappointing results. WRTC fell on the news and management hasn’t been able to stop the declines. The exit of the company’s chief executive officer last month hardly quieted the skeptics. Unless Wrap Technologies can change perception in a hurry, the declines in WRTC are likely to continue.
There’s usually not a better way to find overvalued stocks than ‘hot’ initial public offerings. Supply of the stock is limited, which can temporarily increase the share price. Traders looking for an IPO ‘pop’ often bid the stock up only to eventually move on to another opportunity.
Lemonade certainly seems to fit that bill. LMND stock has almost exactly doubled from its IPO price. And while there’s an interesting story here, valuation is a significant question mark. LMND trades at 35x revenue, a massive multiple for an insurance company, if a tech-enabled one. Book value, a commonly-used metric in the sector, is negative.
To be sure, there’s an intriguing case here. But it’s fair to wonder whether that case really is worth $3.5 billion. Lemonade seems like a trendier, more tech-friendly version of Esurance. Allstate (NYSE:ALL) acquired that business for just $1 billion back in 2011.
Obviously, this is a different market, and Lemonade may be a better company. But at this price, it had better be. And with investors selling LMND despite what looked like a strong earnings report on Wednesday, something more than perfection may still be priced in.
GSX Techedu has been hit from all sides by bad news of late. This summer, a short-seller alleged that the company was inflating revenue, echoing claims made for some time. GSX stock managed to mostly shake off the allegations, but in the wake of the scandal at Luckin Coffee (OTCMTKS:LKNCY), many investors took the bearish argument seriously.
With the pullback now just shy of 50%, an investor might want to argue that the bad news is priced in. That’s not necessarily the case. GSX still trades at 310x next year’s consensus earnings per share estimate. Peers TAL Education (NYSE:TAL) and New Oriental Education (NYSE:EDU) are far cheaper. The bears haven’t been sated. And earnings loom next week at a time when investor confidence seems dented, if not shattered.
Meanwhile, GSX only trades back where it did in early July. It absolutely can get worse, and investors would do well to buy the stock on a further pullback if they buy it at all.
Admittedly, there’s a lot to like in the Roku story. The company is at the center of the streaming revolution. It’s turning the Roku Channel into a content powerhouse. Incredibly, Roku has left the likes of Amazon and Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL) in the dust. It successfully took on another giant, making Comcast (NASDAQ:CMCSA) blink in a dispute over carriage of the Peacock app.
That win over Comcast sparked the most recent rally in ROKU stock. A surprise profit in the third quarter seems to add to the optimism.
But ROKU also dropped 12% last Monday amid wide pressure on pandemic winners. And valuation is a big question mark. A 17x multiple to revenue doesn’t seem that onerous given the strength of the story. Yet that multiple includes sales of Roku devices, which account for about 30% of sales at the moment.
Even the surprise profit of nine cents per share doesn’t necessarily support a current price above $230. And the strength in the quarter is no surprise given the boost from the pandemic.
Indeed, even Wall Street sees the stock as overvalued: the consensus price target currently sits at $191. With so much good news priced in, and not much good news left to deliver, ROKU may finally be due for a pullback.
Though it’s one of the overvalued stocks, I’m loath to bet against PLUG stock at this point. Plug Power too has an attractive story, as its hydrogen-powered GenDrive forklifts are gobbling up market share. Billings more than doubled in the third quarter.
A company with a long history of disappointment, meanwhile, has finally begun to execute. With a vertical integration strategy expanding the company’s addressable market, that suggests years, and perhaps decades, of growth ahead.
All that said, valuation is awfully stretched following a post-earnings rally. Even looking to 2024 targets, PLUG trades at something like 70x earnings and 8x billings. Meanwhile, even a massive rally this year has seen repeated pullbacks.
Plug Power has been able to race past lowered expectations to drive the rally so far. It may have more difficulty clearing a higher bar.
‘Gig economy’ platform Upwork soared last week along with Uber (NYSE:UBER) and Lyft (NASDAQ:LYFT) after California voters passed Proposition 22. Prop 22 defines gig workers as independent contractors, meaning that Upwork won’t have to offer benefits to employees or pay employment-related taxes.
After the rally, UPWK doubled in two months. And that may be a bit too much. The company isn’t profitable, or all that close. Competition will be stiff, with Fiverr (NYSE:FVRR) among the many rivals.
There’s also the fact that the gig economy is seeing near-term benefits now in a time of higher unemployment, but those benefits are likely to fade as normalcy returns. UPWK stock certainly doesn’t appear priced as such. It may be that investors are focusing too much on short-term news, and ignoring long-term challenges — and a steep valuation.
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.