With the Nasdaq nearly in a bull market (believe it or not), many companies reporting solid earnings, and the stock market coming off a scorching hot January, I’m very optimistic about stocks. But just as “there’s always a bull market somewhere,” as CNBC’s Jim Cramer loves to say, there are always overvalued stocks to sell.
Now is no exception. Despite the market’s strong outlook, many companies face competitive threats that the Street seems to ignore. Meanwhile, amid continued unfounded worries about a recession, the valuations of many staples stocks have gotten far too high. And, of course, as always, I recommend selling the overvalued stocks of any companies whose businesses are based on cryptocurrencies.
|PG||Procter & Gamble||$142.61|
One of the overvalued stocks on this list facing underestimated competitive threats, Starbucks’ (NASDAQ:SBUX) shares look poised to sink this year, despite the coffee retailer’s iconic status.
The company’s fiscal first-quarter results, reported on Feb. 2, indicated that Dutch Bros (NYSE:BROS) and Luckin Coffee (OTCMKTS:LKNCY), the company’s tough, young competitors in the U.S. and China, respectively, are having a significant, negative impact on SBUX.
Specifically, the number of Starbucks transactions at comparable stores fell 2% globally versus the same period a year earlier. Due to a 7% increase in the average amount spent per transaction. The company’s global comp sales rose 5% year-over-year.
Still, the average amount spent likely climbed primarily because of multiple price increases that the retailer implemented last year. With competition surging, the company won’t be able to keep fueling revenue gains with sales increases this year.
Additionally, as in the past, I’m convinced that the work-from-home trend is hurting the company and that SBUX is consequentially unlikely ever to be as strong as it was in its pre-pandemic days.
The company will get a lift from China’s reopening. But worth noting is that the operating income last quarter of its Americas region came in at $1.2 billion, just slightly above the $1.1 billion of OI it generated during the same period last year.
With costs and competition still rising and the company probably unable to increase its prices much more in 2023, SBUX’s profitability in the Americas is likely to fall this year versus its 2019 levels. Therefore, it is definitely among the overvalued stocks to consider selling.
Walt Disney (DIS)
Like Starbucks, Walt Disney (NYSE:DIS) has a powerful brand but is facing intense, structural challenges that it probably won’t be able to overcome. And interestingly, like Starbucks, Disney brought back a previous, well-regarded CEO who could not greatly improve its situation.
Disney’s main problem is that the two sectors generating the lion’s share of its profits — in-theater movies and cable TV channels — are continuously contracting. And the company’s leading solution to those challenges has been to double, triple, and quadruple down on its streaming products that aren’t profitable.
Accordingly, Disney’s total segment operating income came in at $12.12 billion in its fiscal year, which ended in Oct. 2022, versus $14.87 billion in its fiscal year, which ended in Sep. 2019.
Last year, the company’s financial results were boosted by lifting the coronavirus lockdowns in many countries. And like Starbucks, DIS has raised its prices multiple times. But facing tougher comparisons this year and probably unable to raise its prices much further, DIS is likely to struggle mightily in 2023.
Despite all its issues, DIS is trading at a relatively robust forward price-earnings ratio of 26. As a result, it’s definitely one of the overvalued stocks to sell now.
CVS Health (CVS)
Over the last decade, Amazon (NASDAQ:AMZN) has entered several new businesses and failed to disrupt them meaningfully. But for a few reasons, the company’s two major healthcare initiatives will make a meaningful splash, causing CVS Health’s (NYSE:CVS) financial results to deteriorate by the end of 2023.
Amazon will start delivering generic drugs that treat over 80 conditions for $5 per month for its Prime members. According to the company, the service will lower the average Prime member’s costs by $100 annually.
Meanwhile, the e-commerce giant is entering the in-person clinic business by acquiring One Medical, which operates a network of primary care clinics.
This time will be different for Amazon because its CEO, Andy Jassy, who took the helm at AMZN in 2021, is likely much more eager to disrupt sectors than his tycoon predecessor, Jeff Bezos, was. Moreover, while AMZN tried to disrupt the health sector without acquisitions in the past, this time, its acquisition of One Medical should make its effort to disrupt the clinic business much easier.
CVS generates a cumulative 47% of its revenue from its Prescription Drugs and Health Care Services businesses. (The latter business is dominated by its MinuteClinics).
Colgate-Palmolive Company (CL)
Colgate-Palmolive (NYSE:CL) is one of the consumer staples retailers whose valuations have gotten ridiculously overextended because of the massive demand for their stocks due to recession fears. As I noted in this and previous columns, those worries are far overdone.
CL is trading for 34 times its trailing price-earnings multiple. That’s double the average P/E ratio of the S&P 500 for the stock of a company that’s never going to grow its revenue and profits, excluding acquisitions, very rapidly.
The company’s 2.55% dividend yield is nothing to sneeze at when 2-year Treasuries yield 4.1%. Thus, its dividend yield is nothing to get excited about either.
And ominously for CL, its sales volume, excluding acquisitions, actually fell 4% year-over-year last quarter. The company managed to increase its organic sales by 8.5% with a 12.5% average price hike. But after that considerable price hike, I doubt the company will be able to get away with raising its prices again this year.
Also boding poorly for CL, as investors have become more upbeat about the stock market and the economy this year, its stock has sat out the market’s rally. In fact, through Feb. 2, its shares had slid 6.4% in 2023.
Procter & Gamble (PG)
Another huge staples maker, Procter & Gamble (NYSE:PG), shares the same basic characteristics as CL. The latter company’s price-earnings ratio is 25, well above the S&P 500’s average, for a company that’s never going to become the next Tesla (NASDAQ:TSLA) or the next ServiceNow (NYSE:NOW).
And like CL, PG’s sales volume, excluding acquisitions, fell meaningfully last quarter, sinking 6%. While PG, like its peer, more than offset the decline with a 10% price hike, it probably won’t be able to raise prices again by much this year.
And PG’s dividend yield of 2.6% is nice, but it’s dwarfed by the two-year Treasury’s 4.1% yield.
On Jan. 20, calling PG’s results “mixed,” investment bank Stifel wrote that the shares were trading near fair value and kept a “hold” rating on the name. Since analysts rarely slap “sell” ratings on stocks, that’s a relatively bearish assessment of the company’s prospects.
Despite the stock market’s rally so far this year, PG stock fell 6.2% from the beginning of the year through Feb. 2.
Speaking of overvalued stocks, Coinbase (NASDAQ:COIN) has soared incredibly so far this year, jumping 130% in 2023 through Feb. 2. But multiple, bearish news indicates that the shares are going to have a very bad 2023.
On Jan. 11, Bank of America cut its rating on COIN stock to “underperform” from “neutral” and slashed its price target to $35 from $50. After analyzing Q4 crypto transaction volume data, the firm believes analysts’ average 2023 estimate is meaningfully too high.
Also issuing a very bearish note on COIN on Jan. 11 was the Japanese bank Mizuho. The firm stated that the layoffs do not address Coinbase’s most significant challenge: in the words of The Fly, that issue is “deteriorating volumes amid retail crypto trading fatigue.” Mizuho expects the company’s 2023 sales to be 30% below analysts’ average estimate. It kept an “underperform” rating on the shares.
In another negative development for COIN, its CEO, Brian Armstrong, has already unloaded $4.5 million of COIN shares in 2023, while his CFO, Alesia Haas, dumped $3.4 million of the stock.
And finally, I’ve recently seen signs that Bitcoin (BTC-USD), the most widely held cryptocurrency once viewed as cutting edge, has become a laughingstock for many on the Street and in the financial news media.
Specifically, reacting to Cathie Wood’s ridiculous assertion on Feb. 1 that the Bitcoin price would reach $1 million, CNBC’s Jim Cramer said, “That was funny. I mean, I said ‘hoo-ha,’ I laughed.” He added, “When I was in the Sea of Galilee, and I walked on water, it was a pretty good time. I’m trying to find something that could be as outlandish!”
And on Feb. 2, in a tone that also appeared to mock Bitcoin, CNBC’s Josh Brown said that artificial intelligence would become very useful for companies and consumers, unlike Bitcoin.
Investors often look to experienced traders who appear on TV, like Brown and Cramer, for guidance. Their mocking of Bitcoin will likely cause many retail investors to forego trading cryptos. That, of course, would be bad news for COIN.
Silvergate (NYSE:SI), a bank that’s heavily invested in crypto, was the latest source of bad news for the sector.
Specifically, on Feb. 2, Bloomberg reported that the Department of Justice was investigating SI’s links to two firms, FTX, and Alameda Research, both of which had strong ties to Sam Bankman-Fried. The DOJ has charged Bankman-Fried with “money laundering, conspiracy to commit wire fraud and securities fraud.”
Given the accusations against Bankman-Fried and the Biden administration’s general antipathy to crypto, there’s a good chance that DOJ will take significant action against SI.
Also ominously for Silvergate, the bank stopped paying dividends on its preferred stock in late January, and its deposits tumbled by more than 50% last quarter.
In the past, SI has relied on a “government sponsored enterprise” for significant financial support. With the Biden administration cracking down on SI, that financial support will probably not be available anymore, making bankruptcy a much more likely prospect for SI. Thus, it is among the top overvalued stocks right now.
On the date of publication, Larry Ramer had a long position on LKNCY. He was shorting COIN and may open a short position in SI in the next week.
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