As a riff on a common philosophical quip, if a bubble isn’t acknowledged, does it really exist? There seem to be a lot of investors (and maybe the Federal Reserve) denying the existence of one or more market bubbles. And that means you may be overlooking some bubble stocks that look due for a selloff.
Let’s be clear. Now is not the time to panic. Summer tends to be a quieter time for markets. But this doesn’t mean it isn’t time to remove some dead weight from your portfolio. A good gardener knows they have to prune the dead branches to help their garden thrive. It’s the same way with stocks.
But what constitutes a bubble stock is largely in the eye of the beholder. For the purposes of this article, I’m defining a bubble stock as one that is objectively overbought. And as the markets try to reach some sort of equilibrium, now may be a good time to sell shares of these stocks before they drop… or drop further.
Here are seven bubble stocks that you can stay away from this summer.
- Tesla (NASDAQ:TSLA)
- Square (NYSE:SQ)
- United Natural Foods (NYSE:UNFI)
- Peloton (NASDAQ:PTON)
- Intuitive Surgical (NASDAQ:ISRG)
- The Trade Desk (NASDAQ:TTD)
- Campbell’s Soup (NYSE:CPB)
Tesla shares are down 14.5% in 2021 as of the close of markets on June 8, 2021. However, TSLA stock remains up 218% in the last 12 months. But that’s not the reason that Tesla makes my list of bubble stocks. And I also don’t put much stock in the Bitcoin (CCC:BTC-USD) narrative.
The reason why Tesla makes this list, in my opinion, is because investors are quickly reaching a reckoning point. For some time, bullish investors have been able to justify a high stock price for Tesla by saying it’s not a car company, it’s a technology company.
Yet, that argument seemed to only apply when the company was in the habit of reporting disappointing delivery numbers. Now that the company is hitting, or exceeding, its targets, it’s hard to make the claim that Tesla is not a car company.
And if it’s a car company, then investors have to be aware of the competition that’s developing in the electric vehicle (EV) space. While it’s correct to say that Tesla still enjoys a quite sizable first mover advantage, it’s likely to face strong competition sooner rather than later. When that happens, Tesla CEO Elon Musk will need more than the power of social media to prove the company’s value.
Square is another stock that looks like a likely candidate as a bubble stock in the summer of 2021. The long-term case for SQ stock remains as positive as ever. However in the short term, the company is likely to face slower growth in its CashApp as stimulus money continues to wind down.
And Square continues to show a heavy correlation to Bitcoin. This correlation is likely to continue after the company’s announcement of its $5 million investment in a solar-powered Bitcoin mining facility as part of its partnership with Blockstream.
Another reason for concern is that Square is likely to face competition for both consumers and businesses. For example, PayPal (NASDAQ:PYPL) is expected to enhance its digital wallet capability and smaller companies such as Stripe will also make it difficult for the stock to continue its current growth trajectory.
SQ stock is up 138% in the last 12 months. However, the stock is trading down 1.62% in 2021. And the road to that decline has been filled with volatility.
United Natural Foods (UNFI)
United Natural Foods is the primary wholesale grocery distributor of Whole Foods Market. Whole Foods, in turn, is a wholly-owned subsidiary of Amazon (NASDAQ:AMZN). This will extend United’s relationship with Whole Foods into 2027.
So why am I including the company on my list of bubble stocks? The stock price is up 132% year-to-date. However, UNFI stock looks as if growth is fully priced in. The share price has hardly moved since the initial bump from the company’s March 9 announcement that it was extending its relationship with Whole Foods. Analysts are projecting the company’s stock price to dip by over 30% in 2021. And short interest, while declining, remains above 12%.
Some of the concern may be that the company could face declining revenue as the economy reopens. Consumers will have more options for getting their groceries and may move away from the home delivery model. That would hurt the company in areas that are not serviced by a brick-and-mortar Whole Foods location.
There’s also some buzz that United is about to experience some turnover at the executive level. That is usually a reason for investors to take a pause.
The closing of gyms and fitness centers during the pandemic gave Peloton the last laugh after the backlash it received from its 2019 holiday commercial. However, with a stock that’s down nearly 40% in 2021, the question on investors mind is whether the price is right.
I like the long-term case for Peloton, and so do the analysts, but at this moment I believe more air should come out of the bubble. The company has many orders to fill in its pipeline. And it’s far too early to tell if Americans will change their fitness habits.
PTON stock simply seems too expensive at its current level. The company has a market cap of approximately $31 billion to go with projected annual sales of $4 billion. The subsequent price-to-sales ratio of 7.8 may not seem that out of line.
However, I’d like to see how the company weathers the ongoing recall of the company’s treadmills and see traction in the growth of their subscription revenue before looking at PTON stock as a buy.
Intuitive Surgical (ISRG)
Intuitive Surgical stock is down nearly 7% since gaining to a three-year high on April 21. That has lopped off most of the stock’s gains for the year.
Some analysts view ISRG stock to be as disruptive to the medical equipment industry as Tesla was to the automobile sector. That may be true, which is one reason why it makes this list of bubble stocks.
In fairness, ISRG stock was a surprising winner during the pandemic. Many hospitals and medical centers had to postpone elective surgeries. However, ISRG stock is up 110% since closing at a pandemic low of $394.19 in March 2020.
One reason for the surge in ISRG stock is its commitment to artificial intelligence as the future of robotic surgery. The company may be right, but that’s also key to my reason for suggesting Intuitive Surgical may be heading down in the short term. Like electric vehicles (EVs), the sensors that power AI contain computer chips, a sector that’s experiencing a global shortage at the moment.
With that in mind, I expect slower growth, which will make it difficult to justify the growth in ISRG stock that looks already priced in.
The Trade Desk (TTD)
By now you’re seeing a familiar pattern with these bubble stocks. These companies showed strong growth in 2020, but are delivering weaker results in 2021. That’s the case with The Trade Desk. TTD stock climbed nearly 400% from its pandemic selloff to the end of 2020.
However, that growth has turned in the other direction in 2021. The stock is down 25% and it looks like the stock could move lower. Right now it’s about expectations. In the case of The Trade Desk, it’s not giving analysts enough confidence that it can deliver the kind of growth to support a valuation that is 24x this year’s expected sales and 92x expected earnings.
The consensus price target of analysts calls for TTD stock to move much higher. But the stock has been hit with several price target downgrades in the last month.
As a category leader in digital advertising it’s certainly possible the company could surprise to the upside. However the stock still appears to be trading at a premium.
Campbell’s Soup (CPB)
I didn’t expect to put Campbell’s Soup on my list of bubble stocks. As a company that was likely to benefit from consumers stocking their pantries during the pandemic, it surprised me to see a lot of volatility on the CPB stock chart.
However, the last three earnings reports have brought sharp price movement for the company’s stock.
Unfortunately it was a pattern where investors bid up the stock in advance of earnings. Then when earnings disappointed, the stock went down. So investors need to be a little concern that CPB stock is moving higher in advance of its earnings report later today. For the moment, it appears Campbell’s Soup may post a slight beat on the bottom line. However revenue is projected to be 25% lower on a year-over-year basis.
If the pattern holds, then expect to see CPB stock head lower. As of this writing, CPB stock is in the middle of the range it’s been in for the last 12 months.
On the date of publication, Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Chris Markoch is a freelance financial copywriter who has been covering the market for seven years. He has been writing for InvestorPlace since 2019.