- Home Depot (HD) — Lower spending on non-essential household items could be in the offing. In addition, the stock’s price multiples are sky high, which is a rarity for mature companies.
- Tesla (TSLA) — Cyclicality could catch up with Tesla. Its vehicles are “best-in-class”. However, economic throughs have previously shown to impact most discretionary companies.
- Visa (V) — Crowdedness is a problem. Many digital payment solutions have arisen during the past few years, leaving Visa stock’s price level in question.
The Dow Jones Industrial Average is a tricky play. It’s a price-weighted index, meaning that its constituents with higher prices carry the most weight. Price-weighted indices usually benefit from momentum scenarios; however, they contract abruptly whenever the economy enters a shaky stage. This is because a fragile economy drags down earnings, subsequently leaving price-indexed stocks overvalued. Additionally, momentum phases end in market contractions, which contributes to severe market drawdowns.
I’ve identified three Dow stocks that investors should be wary of going into the second quarter. Although I substantiated my picks with quantitative measures, I mostly went on industry knowledge here as I’ve been following most of these companies closely over the past few years.
So, without further ado, here are three Dow stocks to sell:
Home Depot (HD)
Although it’s pulled back recently, Home Depot (NYSE:HD) stock is still overextended. The company could face severe headwinds in Q2 as a rise in household obligations could bite into non-essential household appliance spending.
As the macro environment evolves, we see elevated risk of spend shift away from the Home Furnishings category via inflation, COVID pull-forward, lower-income consumer pressures, and shift back to experiences such as travel
Home Depot stock has run its course for now. HD stock is trading at price multiple premiums, which is exceptionally rare for a mature stage company with a strong market position. The stock’s trading at 2.15x its sales, 19.19x its cash flows, and has a forward price/earnings-to-growth (PEG) ratio of 3.12x, leaving me with much to be pessimistic about here.
Sure Tesla (NASDAQ:TSLA) is a “best-in-class” company in the electric vehicles (EV) space, but it remains a cyclical stock. I had some hope for Tesla at the turn of the year; however, global economic data keeps disappointing. The World Bank recently cut its global GDP growth estimate by 0.9%, inflation in the U.S. is running hot at 8.5%, and retail numbers in China are weak amid renewed pandemic lockdowns.
Systemic headwinds will start affecting this stock soon. Discretionary spending tends to top out during the late stages of economic peaks, which is why Tesla’s sales are still doing all right at the moment. However, the stock market is a forward-looking domain, and I won’t be surprised if we see TSLA stock crash soon.
TSLA is overvalued with a price-to-earnings ratio of 151.64x, a price-to-sales ratio of 18.83x, and a price to cash flow multiple of 92.42x. Whenever you’re valuing cyclical stocks, the golden rule is to look at their 5-year normalized averages, and most of TSLA’s price ratios exceed their normalized averages, suggesting that its stock is poor value for money at the moment.
Visa’s (NYSE:V) struggling with crowdedness in the digital payments space; it’s as simple as that. The pandemic encouraged a wave of new digital payment solutions to enter the market, many of which aren’t reliant on traditional merchant services. Visa stock had a great run during the past five years as it gained by nearly 140% while distributing respectable dividends.
However, the time has come for Visa stock to correct. It’s trading at 17.96x times its sales, 28.38x times its cash flow, and exhibits little earnings per share growth with a PEG ratio of 1.45x. Lastly, Visa stock has tumbled below its 6-, 9-, and 12-month moving averages, conveying a downward momentum trend.
On the date of publication, Steve Booyens did not hold any position (either directly or indirectly) 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.