Broader markets as well as some of the darlings of Wall Street have been making record highs in January. However, as the earnings season continues, investors might be getting ready to take some risk off the table and book profits following the massive rally of recent months. Therefore today, we introduce seven hot stocks that may cool off in early 2021.
Market participants might at this stage contemplate how much worse the pandemic can get before its health and economic effects are behind us. As a result of the over-stretched valuations, many stocks have little margin of safety. Thus we might see wild swings in stock prices in the coming months.
Recent research led by Ruben Arevalo of the Polytechnic University of Valencia, Spain states, “Financial markets are complex and non-linear dynamic systems, so their predictions are really challenging.” Buy-and-hold retail investors should ideally not be concerned with the daily or weekly volatility in equity markets. Instead, they should concentrate on picking robust firms that are likely to create shareholder value for many quarters.
On the other hand, declines in the prices of robust hot stocks also provide investors with better entry points into some of the leading names. Therefore, it is helpful to keep an eye on profit-taking that might be happening in the markets.
With that information, here are seven hot stocks that we believe will take a breather in early 2021:
- EnerSys (NYSE:ENS)
- Enphase Energy (NASDAQ:ENPH)
- Intel Corp (NASDAQ:INTC)
- MongoDB (NASDAQ:MDB)
- Nvidia (NASDAQ:NVDA)
- Quantumscape (NYSE:QS)
- Zscaler (NASDAQ:ZS)
Hot Stocks: EnerSys (ENS)
52-week range: $35.21 – $93.39
Dividend yield: 0.85%
First on this list of hot stocks is Reading, Pennsylvania-based EnerSys, which manufactures industrial batteries as well as related products, such as chargers, power equipment, outdoor cabinet enclosures, and battery accessories. It is one of the most important global names in stored energy solutions for industrial applications.
In early November, EnerSys released Q2 results. Net sales were $708.4 million, a 7% YoY decrease. On a non-GAAP basis, adjusted net earnings per diluted share were $1.00, representing a 18.7% decline YoY. Its gross profit margin was steady at 25%.
CEO David M. Shaffer commented, “Our Energy Systems business held up well as telecommunications operators continue to expand their capacity and continue their 5G rollouts in a measured fashion… To offset the year over year reduction in revenue, we have taken multiple initiatives to flex our operational expenses. These expenses not only decreased by nearly $13 million for the quarter from the prior year, but as a percentage of sales it improved by 60 bps.”
Although I like the company and its prospects, the shares would offer better value around $85 or even lower.
Enphase Energy (ENPH)
52-week range: $21.49 – $222.43
Dividend yield: N/A
Fremont, California-based Enphase Energy provides energy management solutions with an emphasis on microinverter systems for the solar photovoltaic industry. Its semiconductor-based microinverter system converts direct current (DC) electricity to alternating current (AC) electricity.
According to the most recent quarterly metrics, revenue was $178.5 million in the third quarter of 2020, compared to $180.1 million in the prior year period. Non-GAAP net income was $41.8 million, compared to $39.5 million in the prior year period. Non-GAAP diluted earnings per share remained the same as in the third quarter a year ago at 30 cents. Cash flow from operations was at $67.5 million.
Management cited, “Demand for our core microinverter products rebounded strongly in the third quarter of 2020. We experienced record sell-through from distribution to installers, resulting in channel inventory slightly below the low end of our typical target range.”
ENPH stock’s forward P/E and P/S ratios are 142.93x and 40.80x, making the valuation overstretched. The share price had an amazing run-up in 2020, reflecting strong investor enthusiasm in the alternative energy space.
I believe that over the next decade, hot stocks like Enphase is well positioned to grow. But it might not be possible to maintain the current share price momentum in the short-run. Investors should not be surprised to see wild swings in stock price in the coming months.
52-week range: $43.61 – $69.29
Dividend yield: 2.5%
Santa Clara, California-based Intel is the largest chipmaker globally, with products ranging from personal computing to data centers. It delivers computer, networking, data storage, and communications platforms. The company is currently the market-leading provider of central processing units (CPUs) for laptops, desktops, and servers.
Intel released Q4 results on Jan. 21. Fourth-quarter revenue was $20 billion, down 1% YoY. Non-GAAP net income was $6.2 billion, down 6% YoY. It delivered earnings per share of $1.52 on a non-GAAP basis, down 10% YoY. In 2020, the company generated a record $35.4 billion cash from operations and $21.1 billion of free cash flow during the quarter.
CEO Bob Swan said, “We significantly exceeded our expectations for the quarter, capping off our fifth consecutive record year. Demand for the computing performance Intel delivers remains very strong and our focus on growth opportunities is paying off. Intel is in a strong strategic and financial position as we make this leadership transition and take Intel to the next level.”
In general the shares have underperformed both the semiconductors sector and the broader U.S. equity market over the past years. Yet, since the start of 2021, the shares are up about 10%. There might soon be some short-term profit-taking in the shares. A decline of about 5% would improve the margin of safety.
52-week range: $93.81 – $399.00
Dividend yield: N/A
New York-based MongoDB, Inc. is a database platform for high volume data storage. Its primary subscription package is MongoDB Enterprise Advanced. Users have access to tools that make querying and indexing possible and easy. Management has been aiming to take advantage of digitalization trends and the growth in machine learning, artificial intelligence (AI), and Internet-of-the-Things (IoT).
MangoDB announced Q3 metrics in early December. Revenue came at $150.8 million, an increase of 38% YoY. Subscription revenue was $144.1 million, an increase of 39% YoY. Services revenue was $6.7 million, up 19% YoY. Non-GAAP net loss was $18.2 million or 31 cents per share, compared to $14.6 million, or 26 cents per share, in the prior year period.
CEO Dev Ittycheria remarked, “MongoDB continued to perform at a high level in the third quarter, highlighted by revenue growth that was well ahead of our expectations. With the recent announcement of multi-cloud clusters, MongoDB Atlas is the first cloud database to enable an application to run simultaneously across multiple cloud providers.”
The company has a market capitalization (cap) of $21 billion. Thus, it has the potential to grow a lot more in the new decade. However, in the short-run, the shares might take a pause.
52-week range: $180.68 – $589.07
Dividend yield: 0.12%
Santa Clara, California-based Nvidia is one of the most important chip stocks, focusing on personal computer (PC) graphics, graphics processing unit (GPU) and artificial intelligence (AI). The group operates through two main segments: GPU and Tegra Processor. Its GPU product brands are aimed at specialized markets, such as gamers, designers, AI, big data, and cloud-based visual computing.
In Q3, Nvidia reported record revenue of $4.73 billion, up 57% from $3.01 billion from a year earlier. Non-GAAP net income was $1.83 billion, a 66% increase YoY. Non-GAAP earnings per diluted share were $2.91, up 63%. Free cash flow was $806 million, representing a 48% decline YoY.
During the quarter, data center revenue saw a 162% increase, thanks to increased use by cloud companies. Also, during the lockdowns in 2020, gaming has increased, contributing to sales figures. Moreover, telecoms are beginning to depend on Nvidia’s processors in their 5G infrastructures.
CEO Jensen Huang cited, “NVIDIA is firing on all cylinders, achieving record revenues in Gaming, Data Center and overall… We are continuing to raise the bar with NVIDIA AI. We swept the industry AI inference benchmark, and our customers are moving some of the world’s most popular AI services into production, powered by NVIDIA technology.”
NVDA stock’s forward P/E and P/S ratios are 84.9x and 21.97x, respectively. These metrics suggest an over-stretched valuation level. As the company gets ready to release Q4 results in the coming weeks, profit-taking could hit the shares.
52-week range: $9.74 – $132.73
Dividend yield: N/A
San Jose, California-based QuantumScape was formed as a result of a reverse merger with Kensington Capital Acquisition Corp., a special purpose acquisition company (SPAC). The merger completed in November 2020. QuantumScape develops solid-state lithium-metal batteries for electric vehicles (EVs). These batteries are considered to be a holy-grail technology, promising longer ranges and faster recharging times.
It has been a wild ride for QS investors since November. The stock increased almost 80% in December, then lost about 50% in value in January.
Many industry experts agree that the battery technology has much potential. Yet it remains several years away from mass production. The company aims to begin commercialization in 2024. Even with Volkswagen (OTCMKTS:VWAGY) as a strategic partner, it will take at least a few years for QuantumScape to turn any profit.
A volatile stock combines high expectations and a potential high return with high risk. QS stock definitely fits the description. Potential investors should have a long time horizon to hold QS shares. I expect volatility in stock price to continue. At today’s price of nearly $47 per share, there’s plenty of time to buy at a potentially better price.
52-week range: $35 – $218
Dividend yield: N/A
Last up on this list of hot stocks is San Jose, California-based Zscaler, a leading player in cloud-based security. It offers two principal cloud services: Zscaler Internet Access (ZIA) and Zscaler Private Access (ZPA). Management has been taking full advantage of the rapid growth in the cybersecurity industry, especially as a result of the rapid digitalization trends of last year.
In early December, the group released Q1 FY21 results. Revenue grew 52% YoY to $142.6 million. Non-GAAP net income was $20.0 million, compared to $4.9 million a year ago. Non-GAAP net income per share was 14 cents, compared to 4 cents in Q1 FY20. Free cash flow was $42.2 million. A year ago, it had been $9.4 million.
CEO Jay Chaudhry cited, “Our customers are accelerating their digital transformation, and this drove our strong first quarter results. Our visibility and business momentum remain strong, and we are pleased to increase our fiscal year guidance.”
ZS stock’s forward P/E and P/S ratios are 588.24x and 54.39x, respectively. These are high valuation levels. Between now and the next earnings release that is expected in over a month, investors should be ready to see some profit-taking in the shares.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.