Monday’s sudden market crash disrupted investor sentiment. However, growing recession fears have investors pondering which stocks to sell in anticipation of a potential rotation into the Dow Jones.
In July, investors were concerned that tech stocks had peaked after riding high on artificial intelligence (AI) developments. Some stocks were sold into more stable options concentrated in the Dow Jones or, in some cases, holding cash. For example, Warren Buffett reduced Berkshire Hathaway’s (NYSE:BRK-A, NYSE:BRK-B) Apple (NASDAQ:AAPL) holdings by half last quarter, realizing gains and accumulating over a quarter trillion for the next market move.
Investors seeking to emulate the Oracle of Omaha have few names to choose from, as first-half gains came mostly from tech stocks. These could now lose favor as small-cap and value stocks are seen as stronger in an uncertain environment with interest rate cuts and economic slowdown concerns. Whether the “great rotation” means buying safer Dow components or the overall market declines, some tech stocks might be sold for the Dow rotation as valuations may unnerve traders.
Here are three stocks that could see price declines as traders rotate to Dow Jones components and other safer areas in this top-heavy, overvalued market.
Coinbase (COIN)
One of the world’s largest crypto exchanges could be particularly vulnerable if the market turmoil doesn’t calm down. Coinbase (NASDAQ:COIN) reported a relatively solid Q2 earnings report, riding the surge of interest in cryptocurrencies. However, as the flash crash shows, crypto is particularly vulnerable to shifts in market sentiment. The company could quickly reverse its fortunes if the U.S. economic situation deteriorates.
COIN stock is up 35% this year thanks to investors hoping the economy will thread a relatively narrow gap. This gap is between growing too fast so that the Fed will cut rates and slowing down so that investors stay away from high-risk assets like crypto. As such, Coinbase trades at a price-to-earnings (P/E) ratio of 33.7 times. This is actually quite good for a tech stock. However, that’s not where the problem lies.
The company held crypto assets worth $1.2 billion at the end of last quarter. Even with the price of BTC (BTC-USD) remaining relatively stable from April to June, it recorded a $319 million impact on its profit. A substantial drop in the price of crypto could severely impact the company’s bottom line and drag the stock price significantly lower. Therefore, investors should consider Coinbase as one of the stocks to sell for Dow rotation.
Advanced Micro Devices (AMD)
The PC chipmaker has been riding Nvidia’s (NASDAQ:NVDA) coattails as investors expect other companies to develop rival AI chips. Advanced Micro Devices (NASDAQ:AMD) has invested heavily in AI. The company does have AI-oriented chips for PCs. However, it still hasn’t made any headway in taking market share from Nvidia’s enterprise-level AI chips that concentrate most of the sector’s investment.
Investors have pushed the company’s P/E ratio into the triple digits. Yet, its EPS hasn’t kept up. Although the AMD stock price has been drifting lower through the second quarter, it could still have further to go before its valuation stabilizes. Investors may want to consider AMD as one of the stocks to sell for Dow rotation.
AMD currently trades at a P/E ratio of 160 times, which is four times higher than the tech sector average. Analysts have been cutting their outlook for the company over the last three months. They expect the net quarter’s EPS to come in at $0.92, down from the $0.95 expected previously.
DataDog (DDOG)
The cloud hosting company is another firm riding the AI wave that has pushed its valuation to really high overexpectations. It appears that in the future, DataDog (NASDAQ:DDOG) will see strong demand thanks to all the data hosting and processing power that AI will need.
Despite the company’s most recent reported sales growing at a 27% clip, it only just returned to profitability. Any hiccup in AI development could lower its earnings. For instance, major corporations could slow down spending on AI items due to transient economic uncertainty.
DataDog’s main problem in an environment where fear is overtaking greed is that its P/E ratio stands at 308.7 times. This makes DDOG stock a highly speculative investment. Also, its market cap exceeds its enterprise value and the company still pays no dividends.
While it might have good potential in the future, investors may want to consider keeping it on the sell list of stocks to sell for Dow rotation. After all, the current market uncertainty has not been resolved yet.
On the date of publication, Stavros Tousios 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.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
