While the economy tanked in 2020, the stock market roared, making many names overpriced stocks today.
That’s partly because tax cuts and stimulus brought trillions of dollars in new money to the market, searching for assets.
It’s also because investors buy tomorrow, not today. Stocks hit hardest by the pandemic quickly came back, under the assumption 2021 would be a “return to normalcy.”
That may still be the case, but the new normal may look nothing like 2019. Technology has advanced rapidly, transforming many industries. Companies have taken on tons of debt to get through the crisis, debt that will take years of profitable operations to reduce.
For others, the climb back will be slower than the market anticipated, as a third wave of infections forced people back indoors after Thanksgiving.
The result is that there are companies out there that were good, that could be good again, but whose stock looks overpriced going into Christmas.
These are candidates for profit-taking. Never fall in love with your investments. Always take a hard-eyed view.
Look at your own portfolio, at the real 2021 prospects for each company you own, and see if it’s time to take your own profits.
Here are eight overpriced stocks for sale now.
Overpriced Stocks: Disney’s Streaming Growth Can’t Save Today’s Valuation
Shares in Disney rose sharply on Dec. 11, after an Investor Day where it projected its Disney+ service will be bigger than Netflix (NASDAQ:NFLX) in 2024, with up to 260 million subscribers. It said it now has 86 million subscribers to the streaming service.
Shares are trading at an all-time high. The market cap is $311 billion, almost $100 billion ahead of Netflix.
My advice? Sell.
Disney lost $2.8 billion, $1.57 per share, on operations during its 2020 fiscal year, which ended in September. Only the magic of accounting let it report a profit of $2.02 per share.
The company continues cutting back. In late November it increased its layoff figure to 32,000. Longtime TV and movie executives called it a “bloodbath.” Radio Disney is shutting down. Cruising is off until at least February.
Disney plans to hike the price of Disney+ next year to $8/month. Compare that with Netflix, which ended September with over 200 million members, and just pushed through a price increase to $14/month.
Despite its streaming success, Disney will still face the problem of cord-cutting, which is why it launched Disney+ in the first place. Media networks remain the biggest piece of Disney, with $28 billion in revenue last year, against $17 billion for direct to consumer and international.
Executive chairman Bob Iger recently told friends media networks like ABC and ESPN were “over,” that Disney is now all about streaming and theme parks. When will that company be as big and profitable as the old one? The stock price says it will be very soon. Math says it won’t be for some time.
American Airlines: Running Out of Runway
For the last several months buying an airline stock has seemed appealing. The world is slowly waking from its COVID-19 slumber. A vaccine is on its way.
Speculators have been creating overpriced stocks like American Airlines, boosting the price 26% in just three months. If American is the sickest of the airline stocks, that just means it has further to go. At its Dec. 8 price of about $17.50/share, it sports a market cap of $10.5 billion on 2019 revenue of $45 billion.
Even before the pandemic hit, American’s market cap was just half its revenue. If it meets expectations for $4.2 billion in revenue for the current quarter, its total take for 2020 will be $13.3 billion. Over half of that will have come from the pre-pandemic March quarter.
Even with government aid, American has taken on a lot of new debt to reach December. Long term debt stood at $29.6 billion in September, up from $20.9 billion at the start of the year. That’s excluding capitalized lease obligations. American had $8.7 billion in cash in September and was burning through $44 million/day last quarter. That should be declining after 19,000 furloughs, but it’s still substantial.
American is doing all it can to lure us back into the air. The company is eliminating change fees on international flights. It’s showering frequent flyers with gifts. It’s promising more flexibility for travelers in 2021.
Even in the good days of 2019, however, American was a marginal business. Net income was under $1.7 billion, on those $45 billion of sales.
American is admitting to slowing demand. It’s facing a shortage of flight attendants. It’s exiting small markets, blaming the pandemic and lack of government relief.
Investors are buying Delta and Southwest because they have the cash to come back strong. Analysts are not yet convinced about American. Only speculators are.
UAL: Too Much Turbulence Not to Take Profits
United Airlines celebrated a cash burn rate of $25 million/day during its third quarter “earnings” report. The next day it announced the rate had fallen to $21 million. Per day.
To achieve this, the airline cut operating expenses 58%, from almost $10 billion to just over $4 billion. When United reports on Jan. 13, analysts are expecting another $1 billion loss, or $3.65/share, on revenue of $3.65 billion.
They may be disappointed. That’s because the latest spike in COVID-19 infection is cutting air travel, again. Bookings are dropping, cancellations are rising.
United has racked up $8.2 billion in losses during 2020, not counting the current quarter. If an activist bought just 5% of the common these losses, which could offset future United profits, would be at risk. United is rushing through a “poison pill” plan to prevent this at its next annual meeting in May.
Adopting the provision would make a takeover to take the losses away unlikely. Hedge funds couldn’t buy the airline cheap, close it, then use the losses to offset profits elsewhere.
The losses are especially valuable because the Biden Administration hopes to raise corporate tax rates from 21% to 28%. At the higher rate, United would use 2020 losses to offset $2.3 billion in profits each year until the losses are exhausted.
The promise is that if you buy United now, you’ll see big tax-free profits once the pandemic is over. United has become a trader’s stock, incredibly volatile but also highly profitable for those who guess right. The share price doubled between mid-May and early June. Since Halloween it’s up almost 50% again.
What it means for investors is that, if you’re in this stock, your fellow passengers are very nervous. They’re looking for quick profits or (perhaps) quick losses they can short. Maybe it’s time for you to strap on a parachute and get out while the getting is good.
Darden Restaurants: Survival of Dining’s Fittest
Darden opened Dec. 9 at $112 per share, a market cap of $14.5 billion, a little over twice last year’s sales of $7.8 billion.
Darden is best known for its Olive Garden restaurants, which represent over half its revenue. But it has a total of eight chains. Bahama Breeze is a Darden’s restaurant. So are Longhorn Steakhouse and Cheddar.
Given Darden’s survival, analysts are now pounding the table for the stock. TV analyst Jim Cramer says it’s more of a buy the longer the crisis continues.
Darden has managed to make money at Olive Garden while closing half its tables. It reinstated the dividend and paid back its $270 million emergency loan. Once the pandemic is over, Cramer predicts, fast-casual chains like Olive Garden will be “the height of fine dining.”
Darden was next expected to report earnings Dec. 18, for the quarter ending in November. The estimate is for 72 cents/share of net income on $1.7 billion of sales. That would beat last year’s profit on 15% less revenue. Darden had $763 million of cash on its books in August. It had $209 million in operating cash flow during the August quarter. It should have more in November.
Darden shares, however, have had a rocky start to December. The lockdown may have been in spring, but the pandemic is only now cresting. The next quarter may not be great, either.
It’s possible restaurant stocks are getting ahead of themselves. If August’s numbers were an average and you take out the lockdown, $2.80/share of earnings translates to a price to earnings multiple of over 40x.
Darden also faces wage pressure. Trump’s Equal Employment Opportunity Commission is siding with activists who say the sub-minimum wage it pays waiters, even supplemented by tips, violates the Civil Rights Act. As unemployment goes down, Darden will have to compete for workers. A falling pool of young workers will put upward pressure on wages.
Nature also abhors a vacuum. As 2021 becomes 2022 and 2023, competition will return. If you have a profit in Darden stock keep your eyes peeled for the off-ramp. It comes when everyone has fallen in love with it. Maybe it’s here.
Lyft: Can It Ever Get Back to Even?
Lyft has yet to see its $72 IPO price.
Speculators believe that may change soon. Proposition 22 keeps California from calling its drivers employees. Lyft opened for trade Dec. 11 at about $48/share. A month earlier it was about $36.
Analysts see a spectacular growth curve due to resume next year. Revenue more than doubled in 2018. It grew another 70% in 2019. Lyft used the pandemic to cut costs. But at its current price, Lyft still carries a hefty multiple of almost 5 times sales, despite having never made money.
Lyft’s recent Investor Day was filled with bold predictions for the future because the past looks scary. The third quarter showed an adjusted net loss of $280 million on revenues of $500 million, down by nearly half from a year ago. The previous quarter’s revenues were just $340 million. Lyft estimated fourth quarter revenue would be 11-15% ahead of the third, which could get it to $575 million. That’s still 40% below last year.
Proposition 22, which cost Lyft and its allies $200 million to pass, wasn’t a complete victory. It contained some worker protections, just not as many as employees get. Other states are still attacking the gig worker model and the Biden Administration could join them.
As unemployment falls with the end of the pandemic, the company will have to compete for help. Costs for drivers are going to rise.
Analysts note that Lyft’s margins improved during the pandemic. They see a move of people out of crowded cities and into suburbs bringing greater demand. Lyft does best when traffic levels are moderate, during “off-peak” times.
Lyft’s stock rise assumes that profitable growth is coming soon. November rides fell as the pandemic’s latest wave came on. The fourth quarter may not be as good as the company hopes. But investors are buying 2021, which should be better.
My problem is that you’re paying 5 times revenue for a company that couldn’t make a dime when times were flush. Lyft has put on financial Spanx, sucked in its gut and expanded its chest, but the salad days of the gig economy may have passed.
General Motors: The New IBM?
General Motors entered December trading near a five-year high.
The catalyst was its Nov. 8 earnings announcement. This showed non-GAAP net income of $5.3 billion, $2.83 per share when diluted and adjusted, on revenue of $35.5 billion. Under GAAP rules income was just $4 billion, but operating cash flow was $9.9 billion, more than double 2019’s figure.
That means there’s plenty of cash to manage GM’s long-term debts of $83 billion and maintain its pivot toward electric vehicles. CEO Mary Barra always intended to use profits from GM’s big trucks to fund a new line of electrics and electric vehicle business models.
GM plans to spend $5.4 billion/year releasing 30 electrics by 2025, representing 40% of its production. The efficiency of electrics means it no longer has to fight over emissions standards.
Analysts now see two companies at GM. One is an electric vehicle start-up hiring thousands of programmers, big enough to sell batteries to other, smaller players. The other is the company still selling gas-powered trucks and SUVs.
The model reminds me of International Business Machines (NYSE:IBM), which milked its mainframe monopoly for years as it sought a pivot into the cloud. Look at a stock chart and you can see that hasn’t worked. IBM is down 8% over the last 10 years. What analysts want is a complete split, but President Mark Reuss says that’s not in the cards. Not now, anyway.
You can see GM as a glass half-full or a glass half-empty. The pivot toward electrics is boosting the stock price. But its market cap remains below that of Nio (NYSE:NIO), the Chinese electric vehicle start-up.
The bet is that Trump-era cars continue to spin-off cash that funds a Biden-era makeover. But that bet also holds out little hope for top-line growth. As was the case with IBM, the old company’s shrinkage may easily match the new company’s growth, leaving a stock to be bought only by income investors.
Airbnb: Everyone Loved the IPO, So Take Some Profits
Just 12 years after its founding, Airbnb has become deeply embedded in the American consciousness.
But does that mean it’s worth $88 billion, after an IPO originally projected to raise $35 billion? The IPO was a hit largely because CEO Brian Chesky said AirBnB was profitable during the summer quarter. It’s projected to do $3.5 billion of business in 2020. But at $88 billion, that’s 25 times revenue.
If you ignored my advice and bought the IPO, you no doubt think me stupid.
But it’s time to sell.
According to the S-1, AirBnB is a highly seasonal business. While profitable during the summer, it had a loss of $674 million for all of 2019, and nearly $700 million for the first nine months of 2020. This came despite cutting marketing by half and administrative costs by 20%, creating a restructuring charge of $137 million. During the worst of the panic revenue was down 70%.
Despite what should be solid post-pandemic numbers, reviews of AirBnB’s investor roadshow were negative. The company has also been operating long enough to make enemies. Investors buy rental property in tourist cities and list them through the service, pricing out longtime residents. By renting out a place by the night or the week, they can make a profit even if the spot sits empty most of the time. When the pandemic hit, thousands of these properties suddenly hit the market.
This means AirBnB has regulatory risks. Cities want to limit how much of their housing is under the company’s virtual control. At the same time, AirBnB wants its own protections from Google’s Travel and Vacation Rental service.
At its Dec. 11 price, AirBnB is more valuable than Booking (NASDAQ:BKNG), which has a market cap of $83 billion. Most of its listings are still from individual owners, not corporations.
Its new “experiences” service, people hiring themselves out as tour guides, could become a $1.4 trillion market, employing millions of people. But that’s rank speculation.
There are few companies worth 10 times their revenue, and even fewer that, like Zoom Video (NASDAQ:ZM), are worth 25 times revenue. Most are cloud software plays, where rental costs are declining. AirBnB has physical costs, and as its complaints against Google indicate, growing competition.
AirBnB found the perfect window for its IPO. But I think you’ll be able to get in for less next spring.
Facebook: It Will Come Back, Per Diem
Everybody hates Facebook right now. If you have profits, sell now. Then put it on the buy list.
There are reasons the stock is under short-term pressure.
The Federal Trade Commission, and 48 states, filed suit Dec. 9 to make Facebook sell Instagram and Whatsapp, acquisitions the FTC previously approved. It’s part of a global campaign to rein in the power of “Big Tech,” which now threatens even the most powerful governments.
China is rewriting its antitrust rules to go after its Cloud Emperors – Alibaba Group Holding (NASDAQ:BABA), Tencent Group Holding (OTMKTS:TCEHY) and Baidu (NASDAQ:BIDU). The west is doing the same against Cloud Czars Facebook, Alphabet (NASDAQ:GOOGL,NASDAQ:GOOG) and Amazon (NASDAQ:AMZN), whose free and low-cost services have transformed the global economy over the last decade.
The European Union has filed antitrust charges against Amazon over its use of data. India has filed an antitrust suit against Alphabet over Google Pay.
None of these suits ask, let alone answer, the key question Facebook answers. Who, or what, will pay for the clouds?
Facebook’s answer was cash flow, from free ad-supported services. It took a huge risk, but invited the world to join it, with an Open Compute Project to reduce cloud construction costs. The instructions for building a bigger, better, and cheaper cloud, in other words, are freely available.
Did AT&T (NYSE:T) take advantage of this opportunity? No. Did International Business Machines (NYSE:IBM). No. Did Intel (NASDAQ:INTC), HP (NYSE:HPQ) or Dell Technologies (NASDAQ:DELL). No. Neither did any European company or government, despite clouds proving to be the most important infrastructure innovation of this century. Like characters in The Little Red Hen, they waited for the bread to be baked. Now they not only demand to eat it, but to destroy the oven that baked it.
Billions of people who in the 1990s had no communication with the outside world are now part of the global discussion. An Indian farmer making 36,000 rupee, roughly US$487 per year, can now be heard around the world. Without advertising cash flow, Facebook would have to charge for services. The Internet is worthless without the services that run on it.
Why put it on the buy list, then? Because Facebook’s Diem could do the same thing to banks that Facebook did to phone companies in the 2010s.
Diem’s cryptocurrency and its “digital wallet,” Novi, could combine with Kustomer, its latest acquisition, to let anyone become a merchant using WhatsApp for practically nothing.
This is not an innovation. Ant Financial, part-owned by Alibaba, is already doing this.
Developing world phone monopolies charged up to $1/minute for calls less than 30 years ago. Credit networks like Visa (NYSE:V) now charge merchants and customers, huge fees to transact business. Diem can eliminate these settlement charges. Digital currency can transform the developing world and the global economy.
Governments say they’re acting against greedy monopolies in targeting Facebook and the other cloud czars.
They’re really acting against the free Internet and, by extension, billions of people who have benefitted from it. It’s an act of war against the rising prosperity of Asia, Africa, and the global south.
In the long run, it’s doomed to fail.
At the time of publication, Dana Blankenhorn had long positions in AMZN and BABA.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn.
