Stocks to sell

3 Overhyped Stocks Every Smart Investor Should Ignore

The U.S. stock market started the year with an unusual divergence, suggesting overhyped stocks. The S&P 500 hit an all-time high level at 7.3% year-to-date (YTD) rise. And the Conference Board’s Leading Economic Index (LEI) shows market headwinds, having contracted by 3% from July 2023 to the end of January 2024. 

Although not outright pointing to imminent recession, this divergence is reminiscent of previous ones in 2000 and 2007, followed by major stock crashes. With the likelihood of real GDP growth slowing to a standstill in Q2 and Q3, investors should consider some stocks to sell.

Keeping this macro landscape in mind, which stocks have taken in the most unsustainable hype that is likely heading for correction?

Nvidia (NVDA)

Source: Sergio Photone / Shutterstock.com

The investing proposition for Nvidia (NASDAQ:NVDA) is alluringly simple. Both Big Tech and small businesses need GPUs to power generative AI content. Almost on a monthly basis, the rapidly developing sector is pushing new air into the AI hype. And Sora’s text-to-video generation is the latest.

Nvidia has seemingly cornered this data center demand, building on top of 36.65% global market share in the semiconductor sector. For the AI sector specifically, Nvidia is closing on 90% market domination, expected to sell three times as many chips in 2024 than 2023.

However, Nvidia is facing AI competition not only from AMD’s (NASDAQ:AMD) cheaper and purportedly faster MI300X chips, but also from Huawei. In its annual report filed to the SEC, the company identified the Chinese giant as a competitor across its main divisions. Those would be GPUs, Arm-based CPUs, cloud scaling and networking.

Nvidia relies on about 20% of its revenue to come from China, as well as indirectly relying on mainland China factories, such as Foxconn and Dongguan as cogs of its supply chain. Effectively, this puts Nvidia on the same road in which Huawei is neck in neck with Samsung. Another example is when Tesla was forced to implement multiple aggressive price cuts due to Chinese BYD.

So, Nvidia deservedly became the focus of investor interest, but it’s probably a transitory phase ahead of China’s next-gen chip production. Nvidia will remain valuable yet not likely at 66.57 price-to-earnings (P/E) ratio. In the end, investors should ask themselves if having 46% value of Japan’s $4.2 trillion nominal GDP puts Nvidia in a group of overhyped stocks.

Pfizer (PFE)

Source: Manuel Esteban / Shutterstock.com

Pfizer (NYSE:PFE) encountered heightened scrutiny in 2022. Back then, Judge Mark Pittman adjusted the Federal Drug Administration’s extended timeline for the release of Pfizer’s vaccine safety data. This significant historical event for the company spurred widespread discussions about transparency and the regulatory process.

As of February 10th, 2024, the Centers for Disease Control (CDC) reported 22.3% adult coverage in updated C-19 vaccines. And, only 10.8% plan to do going forward. With Pfizer’s money-making product out of play, the stock returned to its February 2016 valuation by the end of 2023, having dropped 34% over the last 12 months.

Yet, this still may not be the end of Pfizer’s bottom. The company overpaid $43 billion to acquire cancer-treating company Seagen. For comparison, PFE’s full-year 2023 revenue was $58.8 billion, a 42% reduction from 2022. With a high debt to equity ratio of 80.8%, an increase by 14.7% over five years, this adds pressure on Pfizer to stay out of lawsuit waters.

However, in November 2023, Texas Attorney General sued Pfizer over misrepresentation of the efficacy of their Covid-19 vaccine. Whether or not this brings a domino of other lawsuits is yet to be determined.

In such a scenario, concerns have been raised about Pfizer stock’s stability. However, it’s important to consider the broader context and the company’s historical resilience. Therefore, while current valuations reflect a period of adjustment, the potential for recovery remains.

U.S. Steel (X)

Source: Shutterstock

Pittsburgh-based U.S. Steel (NYSE:X) gained a 67% stock boost over a one-year period. Yet, following the recession in Japan and Europe, and the LEI-based forecast on near-zero GDP growth in Q2 and Q3, the demand for steel is decreasing.

Furthermore, the Ukraine-Russia war, which invigorated U.S. steel production, is rapidly losing public support ahead of 2024 presidential elections. On top of these headwinds, Japanese Nippon Steel Corporation (NSC) entered an agreement to acquire the U.S. Steel around $14.9 billion in December 2023. 

Although finalized by board members of both companies, the agreement is yet to be approved by regulators. Having contributed to the stock boost throughout the year due to the 40% premium paid by NSC, the upcoming presidential elections could unravel the deal. In turn, this would place heavy selling pressure on U.S. Steel.

On the date of publication, Shane Neagle did not hold (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.

Shane Neagle is fascinated by the ways in which technology is poised to disrupt investing. He specializes in fundamental analysis and growth investing.

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