At the beginning of the pandemic, markets reacted as though the world was going to end. Then, after the Federal Reserve unveiled its stimulus measures, nearly every tech stock rallied, the crypto bubble formed, and meme stocks went to the moon. That was followed by big declines in stocks over fears of interest rate hikes and a recession. Nowadays, while it appears we’re in a “Goldilocks” phase, tread cautiously. Even in the current rally, there are till plenty of overvalued stocks still worthy of a sell, including:
Overvalued Stocks: Occidental Petroleum (OXY)
West Texas Intermediate Oil tumbled 40% over the last year. All thanks to supply issues, China’s weaker than expected economy, and bigger demand for electric vehicles. In addition, the Biden Administration’s sales from America’s Strategic Petroleum Reserve has weighed heavily on prices, too. All of this, of course, is bad news for Big Oil stocks, including Occidental Petroleum (NYSE:OXY).
Moreover, I’ve read that the Biden administration is considering allowing a sort of nonviolent “hostile freeze” to take effect in Ukraine, along the lines of the standoff that the two Koreas have endured for many decades. Also, as we get closer to the U.S. presidential election, I believe that such a scenario is growing increasingly likely, particularly if Biden’s anti-war primary challenger, Robert F. Kennedy, Jr, continues to climb in the polls.
If a de facto cease fire does take hold in Ukraine, oil prices are likely to plunge, with OXY stock following suit.
OXY stock currently has a forward price-earnings ratio of 11.3, but that probably does not bake in a big decline in oil prices in 2024. And the shares climbed last year due to increases in oil prices and Warren Buffett’s purchase of a great deal of the company’s shares, but what comes up often comes down, and even Buffett is not right 100% of the time.
Overvalued Stocks: Clorox (CLX)
Worries about the recession that hasn’t come and isn’t likely to arrive this year or next year have caused the valuations of staples stocks like Clorox (NYSE:CLX) to hit the roof. As of the afternoon of June 15, the shares were changing hands at a forward price-earnings ratio of 28.5. That’s a ridiculously high valuation for a maker of staples products.
Showing that the long-feared recession is unlikely to materialize, Goldman Sachs recently lowered the chances of a recession over the next 12 months to 25%, while the Fed estimates that GDP will climb 1.8% in the second quarter. As fewer and fewer economists warn about an impending recession, many investors will sell staple stocks, including Clorox, and move into more economically sensitive stocks. That’s because staples stocks like CLX are often viewed as good names to buy during recessions. As a result, CLX stock is likely to tumble within the next several months.
Overvalued Stocks: Virgin Galactic (SPCE)
About two years after pausing its space flights due to an issue with a supplier, Virgin Galactic (NYSE:SPCE) is supposed to resume commercial flights in late June. And the company launched a successful test flight last month.
However, I’ve always viewed space stocks as very risky because of the many unsuccessful flights that occur. And recently, Bank of America warned that Virgin Galactic is particularly risky because it’s using only “one mothership.” As a result, if the ship can’t be used for an extended period, SPCE stock is likely to plunge, the bank suggested.
Moreover, SPCE plans to take its tourists, who will be asked to pay hundreds of thousands of dollars each ,”to the edge of space,” i.e. just barely above the atmosphere. Given that point and the high risks involved, I have my doubts about how many tickets the company will be able to sell.
SPCE stock currently has a market capitalization of $1.7 billion. If the company has trouble attracting space tourists and/or it has difficulties with its mothership, it will probably have trouble generating much over $100 million of revenue annually, meaning that it could be valued at a gargantuan 17 times its sales.
Disney (DIS)
Disney’s (NYSE:DIS) huge problems have been evident for many years, but the Street seemingly can’t or won’t internalize them, as its forward price-earnings ratio is a fairly strong 16. Specifically, the lion’s share of Disney’s top and bottom lines are derived from two faltering sectors: cable TV and movie theaters. And meanwhile, its growth sector –streaming — remains unprofitable and faces tons of competition.
In more recent years, another issue –the company’s antagonism of about half of America with its political/social stances — has become problematic. Anyone who thinks such a situation can’t greatly undermine a large company should take a look at what has happened to Anheuser-Busch (NYSE:BUD). I believe that Disney’s blunders in this area have indeed hurt its financial results and will continue to do so for some time.
Showing the weakness of Disney’s growth, analysts, on average, only expect its top line to increase 4.7% in 2024 versus 2023, despite the economy’s strength. I believe that DIS stock deserves a price-earnings ratio more in the 8x-10x range, and I think the shares will get there sooner than later. As a result, DIS is definitely one of the overpriced stocks to sell at this point.
Cava (CAVA)
The shares of fast casual Mediterranean restaurant owner Cava (NYSE:CAVA) doubled on their first day of trading on June 15 in the wake of the company’s IPO.
The shares now have a valuation of roughly 7.4 times the company’s trailing revenue. Cava’s revenue will jump in the coming years because it “has 263 restaurants and wants to expand to over 1,000 by 2033.”
Still, its valuation is far too high, since it’s far from being profitable and faces a tremendous amount of competition. On the profitability front, Cava reported a net loss of $59 million for 2022, and it has warned that its costs will increase in the coming years as it launches new restaurants. As far as competition is concerned, I’ve seen fast-casual Mediterranean restaurants, owned by various companies, in nearly every American city in which I’ve lived or visited over the last decade. And one can argue that Cava also competes with all of the fast-casual restaurants whose food is viewed as healthy.
Chipotle (NYSE:CMG) and Subway, for example, could both be looked at as being in the category.
MicroStrategy (MSTR)
MicroStrategy (NASDAQ:MSTR) has tied its fate to that of Bitcoin (BTC-USD), as the company “holds approximately 140,000 bitcoin worth about $4 billion.”
If Bitcoin tumbles 75%, which I believe is quite likely, the value of MSTR’s Bitcoin holdings would drop by 75% of $4 billion ,or $3 billion. If MSTR’s market capitalization, which is currently $4 billion, falls by $3 billion, its shares will have lost 75% of their value, all else being equal.
The company’s founder and executive chairman, Michael Saylor, contends that crypto will become a “bitcoin focused industry.” But, as I pointed out in a previous column, Washington looks poised to decimate America’s largest crypto exchange, Coinbase (NASDAQ:COIN), while another leading crypto exchange, Binance, also looks destined for failure, given the SEC’s even more onerous lawsuit against it. Additionally, Washington is strongly discouraging the nation’s banks from getting involved with crypto exchanges and the entire crypto sector.
Given these points, I believe that, within six months to a year, Americans will find it very difficult to buy and sell Bitcoin. Consequently, I expect the crypto’s value to plunge, taking MSTR stock with it.
Coca-Cola (KO)
Like Clorox, Coca-Cola’s (NYSE:KO) valuation has become quite excessive because of investors who are afraid of a recession piling into it. Specifically, the stock’s forward price-earnings ratio is 23.4x. That’s a rather high valuation for a company whose bottom line is only expected by analysts, on average, to increase 5% this year. Moreover, unlike, say, most tech companies, many consumer discretionary stocks, and even some financial services firms, Coca-Cola’s profits have virtually no chance of every jumping 10%-15% in a given year.
Moreover, I think there’s a risk that, at some point, the company’s financial results could be significantly, negatively impacted by increased concerns about the unhealthy quality of its flagship beverage. And showing that investors may be already tiring of the name, KO stock has greatly underperformed this year, falling 4% through June 15.
| OXY | Occidental Petroleum | $58.15 |
| CLX | Clorox | $156.54 |
| SPCE | Virgin Galactic | $4.73 |
| DIS | Disney | $91.32 |
| CAVA | Cava Group | $38.15 |
| MSTR | MicroStrategy | $293.39 |
| KO | Coca-Cola | $61.67 |
On the date of publication, Larry Ramer was short COIN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
