With the stock market in red-hot form, it’s time to consider offloading some overvalued stocks.
The U.S. stock market picked up from where it left off last year, wrapping up a robust first-quarter (Q1), fueled by economic optimism and anticipated interest rate cuts. As the saying goes, not all that glitters is gold.
Many stocks have surged to dizzying heights, driven by the meme stock trading frenzy rather than solid financial performance. This frenzy effectively shields the inherent dangers of investing in companies unlikely to withstand economic scrutiny.
Hence, it is imperative to tread lightly, especially in the tech sector, where valuations have skyrocketed to parabolic heights. With that in mind, it’s best to avoid the overvalued picks discussed in the article. These stocks have inflated valuations, trading well above their intrinsic values.
Carvana (CVNA)
Carvana (NYSE:CVNA) has carved out a niche for itself in the used car market. Its innovative car vending machines and high-priced used car buyouts from individuals have made a name for itself.
However, despite the novelty of its approach, its financial positioning could be more stable, marked by minimal profits and a massive debt load. GuruFocus gives it a dismal four out of 10 rating for financial strength, with debt exceeding equity by over 22 times.
Despite narrowly escaping bankruptcy last year and operating in a conducive environment, its stock surged upwards of 337%. Surprisingly, it has kept up the pace in 2024, gaining more than 109% year-to-date (YTD). Credit card and auto loan delinquencies reached their highest level in over a decade, and defaults haven’t peaked as yet. With its stock trading north of over 70 times earnings, it’s best to be cautious with Carvana.
Mobileye (MBLY)
Mobileye (NASDAQ:MBLY) faces major challenges, including a highly inflated stock valuation and lackluster top-line growth. Despite advancements in vehicle safety technology and partnerships with top automotive giants, inventory management concerns and uncertain growth prospects pose serious concerns over its future. Despite its woes, MBLY stock trades over 65 times forward non-GAAP earnings, underscoring its bloated valuation.
In its most recent quarter, the firm saw top-line growth nosedive by more than 47%, while its diluted EPS was a negative 27 cents. Moreover, its bleak forward guidance points to a 9% drop in sales this year at the midpoint compared to 2023.
A lot of its somber revenue outlook could be linked to surplus EyeQ chips as the firm continues to struggle to match inventory with market demand. Given these factors, Mobileye’s risk-reward profile is highly unattractive at this point.
Sherwin-Williams (SHW)
Sherwin-Williams (NYSE:SHW) is a leading player in the paints and coatings industry, boasting strong competitive advantages and consistent growth. However, despite its strengths, the firm is highly exposed to the volatile housing market and fluctuating raw material costs. These issues have become more pronounced in recent quarters, where economic data points to a steep decline in U.S. housing, suggesting further deterioration before any improvement.
In its most recent quarter, its Q1 Non-GAAP EPS came in at $2.17, missing estimates by 5 cents, while revenues of $5.37 billion dipped 1.3%, missing expectations by $130 million. Its bottom line has been weighed down by its long-term investments and higher employee-related costs. Furthermore, the drop in net sales highlights vulnerabilities in demand across various segments, particularly in North America. Moreover, with the broader economic uncertainties to contend with, it’s tough to bet on SHW stock at more than 26 times forward earnings.
On the date of publication, Muslim Farooque 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.