More than ten years have now passed since the market saw its post-crisis low. The S&P 500 index has risen by almost 375% in that period. Many equities have risen by much more — in some circumstances making them stocks to sell.
This has worried technical strategists such as Bob Farrell, who see new market highs as a sign of worry. Mr. Farrell believes that “fear of missing out” could lead to the next market top. After hitting that high point, he predicts wide market swings and below-market returns over the next decade.
Stocks such as Amazon (NASDAQ:AMZN) or Netflix (NASDAQ:NFLX) have supported high multiples for several years. However, history shows that stocks tend to eventually reach “fair value.” A decline like Mr. Farrell predicts would likely bring high-flying equities closer to fair value.
For now, many stocks to watch trade near 52-week highs. In light of a coming market decline, these five stocks to sell could see a significant drop in their prices:
Amid intense competition, Etsy (NASDAQ:ETSY) has stood out among e-commerce sites. It has become a hub by which artisans can market handmade, vintage and unique items. With its website, Etsy brings these products to a worldwide audience. It also serves as a home for a market that would not fit well on an Amazon or an eBay (NASDAQ:EBAY).
This niche has helped propel ETSY stock to near record highs in recent days. Analysts forecast 16.4% profit growth for the year. Although they predict a 50.7% profit increase next year, they expect average earnings growth in the teens for the foreseeable future.
This will hold Etsy in good stead. Still, it may not support the current valuation of ETSY stock long term. The most recent earnings beat sent ETSY higher by more than 16%. This spike propelled the equity to a record high. Although the stock fell slightly following that move, it still supports a forward P/E ratio to over 62. It also leaves the equity with a trailing PE of just over 100.
Further, factors such as the 13-plus price-to-sales ratio help to make Etsy one of the stocks to sell. I expect ETSY stock will become a long-term winner. However, at current multiples, investors should stay on the sidelines.
Ionis Pharmaceuticals (IONS)
Biotech company Ionis (NASDAQ:IONS) treats diseases through the manipulation of genes. This antisense technology, along with its work in RNA therapies, has helped it to develop a pipeline of more than 40 drugs. Medicines such as Spinraza, developed with Biogen (NASDAQ:BIIB), and the newly-approved Tegsedi have helped to bolster the company’s bottom line.
However, despite successes with Spinraza and other drugs, the state of IONS stock could cause concern. Ionis beat earnings estimates in its last earnings report. It also reported 14.5% revenue growth and guided 2019 revenues higher by $725 million. However, one might question whether that justifies its forward P/E to about 127.
Profit growth could also cause concerns. Investors expect earnings to increase by an average of 40% per year over the next five years. However, that estimate may prove high over time as earnings estimates continue to fall. As recently as 90 days ago, Wall Street had predicted 2019 earnings of 39 cents per share. That estimate today stands at 17 cents. Profit estimates for 2020 have also come down during that time.
IONS stock should still perform well in the long term. However, IONS needs time to catch up to its valuation. Given this multiple, I would place it on the stocks to sell list for now and wait to buy at a more reasonable valuation.
Though it has existed since 1983, many investors remain unfamiliar with Pegasystems (NASDAQ:PEGA). Those who have heard of PEGA know it best as a CRM company who produces the Pega Platform. This could-based solution helps sales and marketing professionals. It brings customer service solutions and digital process automation to numerous industries. It also helps Pegasystems earn revenue through software licensing, maintenance fees, and consulting services.
Despite a long history, it has seen most of its stock price growth occur over the last decade. Trading as a penny stock as late as 2008, it has now climbed to new highs in the $67 per share range.
However, like many cloud equities, PEGA stock trades at a premium that likely places it on the stocks to sell list. PEGA’s forward P/E ratio has risen to just above 85. Wall Street forecasts profits growth averaging 20.6% per year over the next five years. That growth rate should command a higher-than-average multiple.
Still, its current P/E ratio indicates that the stock price has moved ahead of company earnings. As a $5.2 billion cloud company, with double-digit profit growth, PEGA stock could easily grow from these levels long term. However, at over 85 times earnings, it appears more likely to correct in the near term.
SBA Communications (SBA)
SBA (NASDAQ:SBAC) owns and operates infrastructure for wireless communications across both North and South America. It earns revenue through both site development and leasing. Moreover, with the development of 5G in recent years, SBA’s role has become more crucial.
Two years ago, SBAC stock completed the process to become a real estate investment trust (REIT). However, thanks to capital loss carryovers from previous years, SBAC will not offer the usual dividend benefits of a REIT until at least next year. Despite the lack of a payout, the stock trades at a forward P/E of about 104. This comes in much higher than both American Tower (NYSE:AMT) and Crown Castle (NYSE:CCI) who currently pay dividends.
Unlike its pre-REIT days, Wall Street predicts profits and profit growth for SBAC stock. In fact, they estimate that earnings will increase by an average of 85.3% per year over the next five years.
So why is it one of the stocks to sell?
Ordinarily, I could tolerate a 100-plus P/E with that kind of earnings growth. However, analysts continue to revise earnings for the company downward. Also, even when SBAC stock finally begins to pay dividends, profit levels indicate yields will come in well below the current 3.72% average yield for equity REITs.
Given the importance of 5G and the new REIT structure, I expect SBAC stock to perform well long term. However, when AMT and CCI offer dividends at a lower multiple, SBA looks like a sell.
Source: Web Summit Via Flickr
Few of the stocks to sell have seen a faster rise than Twilio (NYSE:TWLO). Twilio pioneered the Platform-as-a-Service (PaaS) cloud niche. Their technology powers mobile apps, allowing companies such as Lyft (NASDAQ:LYFT) and Grubhub (NYSE:GRUB) to perform their basic functions.
As the dominant company in this niche, it has posted remarkable growth numbers. Analysts forecast revenue growth of 65.6% this year and 32.2% in 2020. Over the next five years, they also believe average annual profit growth to come in at 36.5%. Even as companies such as RingCentral (NYSE:RNG) and Zendesk (NYSE:ZEN) seek to compete in this space, Twilio should continue to maintain its rapid growth rate for the foreseeable future.
However, even the best companies justify only so much value. Since late 2017, TWLO stock has risen by more than fivefold. As a result, it is supporting a forward P/E ratio of over 450! Admittedly, if investors remained optimistic, and TWLO consistently met or beat estimates, I would not foresee a crash. However, the bull market has reached its 11th year. If investors turn on the market, TWLO stock will have no grounds for its current price.
I expect Twilio to become one of the more critical companies in the tech industry. However, with its current multiple and the potential negative catalyst, investors should avoid TWLO stock at these levels.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
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