It has been another good year for investors. After some early jitters, the markets have stabilized. With the dog days of summer came fresh new highs for all the major U.S. indexes except the Dow Jones — and it’s not far behind.
With markets hitting new highs, not surprisingly, there are many stocks at stretched or concerning valuations.
New highs in and of themselves aren’t a bad or scary thing. Ignore the doomsday folks who predict crashes whenever the market goes up. But fresh all-time highs are a signal that it’s a good time to reevaluate your portfolio holdings. It could be prudent to raise cash or swap to more conservative stocks.
If you’re looking to make moves in September, here are seven popular stocks that have won big in the past but could see their gains start to dissipate rather quickly.
Stocks to Sell Now: Tesla (TSLA)
Tesla (NASDAQ:TSLA) had a great run — a fantastic performance in the capital markets, in fact, since its IPO. But it appears Elon Musk’s ability to defy the critics has ended. Ever since the $420 going private tweet hit, the skies have darkened for TSLA stock.
We quickly learned that funding wasn’t exactly “secured,” opening a Pandora’s Box of potential lawsuits and regulatory action. In fact, the SEC is investigating. Further tweets indicated that Musk claimed to be getting outside advice from bankers on the going private deal and that funding was coming from the Saudis. However, reports from the Board of Directors and the media dispute these claims.
As a result, now that Musk has said that they are staying public, TSLA stock is in a bind. The company needs cash — fast. But with Musk having seemingly deceived the public, it will be hard to sell more stock at a favorable valuation. And the debt market appears closed, as Tesla’s bonds issued last year have already dropped sharply in value and are in junk territory. With losses continuing to pile up, and reports of numerous manufacturing and quality control problems, Tesla faces a tough road ahead.
For now, TSLA stock is a clear stock to sell now, as there are vast risks to the downside.
Stocks to Sell Now: Boeing (BA)
Say what you will about the current president, but Donald Trump has made industrial stocks great again. And there’s perhaps no better example than American aerospace and defense giant Boeing (NYSE:BA).
In late 2016, BA stock traded for $140 per share. Since Trump won, however, BA stock has soared, recently topping $350 per share. For a fast-growing tech company, that sort of move isn’t too crazy. For a staid blue chip airplane manufacturer, it’s downright wild.
Unfortunately, this is probably as good as it gets for BA stock anytime soon. The company is tremendously expensive, selling at 22x earnings and offering just a 2% dividend yield. Traditionally, it has sold for well under 20x earnings and paid a more than 3% dividend.
And while investors have bid up BA stock, they should be aware that the company’s earnings could take a hit. On the commercial side, airlines have ordered planes as though a new golden age of aviation is upon us. But historically, whenever airlines earn higher profits, they expand too much, driving down profit margins and thus demand for new planes in the future. With oil prices, and by extension jet fuel costs, increasing, airlines’ unusually high profits should recede to more normal levels.
On the defense side, things are unlikely to get much better, at least for U.S. demand. Trump is obviously in favor of more military spending and currently controls both Congress and the Senate. Come November, the Republicans appear likely to lose control of the House, and thus the ability to force through defense-heavy budgets. And 2020 isn’t so far away, look for BA stock to take a hit if the presumptive Democratic candidate starts to poll well as the election cycle gets going.
Additionally, the backlash from Trump’s experiment with tariffs could reduce foreign demand for Boeing products in both commercial and defense, making it one of the stocks to sell now before the damage hits.
Stocks to Sell Now: Nvidia (NVDA)
Nvidia (NASDAQ:NVDA) has been one of the most powerful tech stocks in recent memory. From just $20 per share three years ago, Nvidia has soared almost 15x, recently hitting $280 per share. But trees don’t grow to the sky; neither will NVDA stock go up exponentially forever.
The company benefited from tremendously favorable developments in the graphics card market, as both gaming and crypto demand surged. This allowed the company to earn unusually high profit margins. Throw in a huge boost of optimism and hype related to self-driving cars and the stock has soared.
The autonomous vehicle story could play out, but it still an early stage market where a lot could go wrong.
And over in data centers, Nvidia has benefited as GPUs increasingly supplant CPUs for the role of providing server processing power. However, investors have also bid up chief competitor AMD (NASDAQ:AMD) more than 10x in recent years. It’s unlikely that both AMD and Nvidia will extract windfall profits from the data center market, and the loser will likely take a serious market cap hit.
NVDA stock, now at 41x earnings for a company that is projected to grow EPS less than 20% per year going forward, is looking incredibly expensive. Any earnings miss or downturn in guidance will trigger a sharp sell off here.
Stocks to Sell Now: Alibaba (BABA)
Despite the big run in tech stocks, Chinese names are continuing to struggle. The ongoing trade dispute between the U.S. and China certainly isn’t helping matters.
However, much of the blame for the sector’s issues starts with its leading stocks. Both Alibaba (NASDAQ:BABA) and Tencent Holding (OTCMKTS:TCEHY) have traded poorly in recent months. Tencent’s decline makes sense, as China is cracking down on gaming. Alibaba’s drop should concern folks though.
Alibaba’s last earnings report came up short of investors’ hopes. BABA stock initially popped, but then slumped back quickly. That’s because investors thought the company was growing more quickly. Throw in increasing whispers about the company’s aggressive accounting, and just barely hitting expectations was essentially a miss.
With investors putting Alibaba’s business model under the microscope, China in general slumping and continued negative rhetoric coming from Washington, it’s an easy decision to steer clear of BABA stock for the time being.
Stocks to Sell Now: Apple (AAPL)
As I discussed recently, Apple (NASDAQ:AAPL) is likely to fall victim to the winner’s curse. AAPL stock recently became the first ever to reach a $1 trillion market cap. However, in the past, stocks that ascended to the top of the market cap pyramid have tended to underperform pretty badly going forward.
It’s not hard to see why. Once companies get huge, it is much harder to keep growing. Regulatory and anti-trust risks mount. The entrepreneurial spirit starts to fade as a company’s visionaries retire or move elsewhere. And it is harder to attract young talent, as the payoff of rising the organization chart at a huge company is less than at a more nimble smaller firm.
These aren’t insurmountable challenges for Apple. In all likelihood, for long-term investors, there are still more gains to be had in AAPL stock. But don’t expect huge, market-beating returns anytime soon. In fact, if anything, AAPL stock has ramped up as of late because the S&P 500 has pushed to new highs, and the influx of investor money in the index has triggered forced buying into Apple, as the index’s largest-component. With the P/E ratio up to 20 — unusually high for Apple — and the stock up 40 points since last earnings, however, now is the time to ring the register.
AAPL stock could drop back to $200 much quicker than you might expect, making it one of the smart stocks to sell now.
Stocks to Sell Now: PepsiCo (PEP)
PepsiCo (NYSE:PEP) has bounced back after a rough start to 2018. PEP stock dipped from $120 in February to as low as $97 this spring. Now back up to $112, this is a good time to take profits, as Pepsi still faces various headwinds.
PEP stock has outperformed its consumer staple peers recently. But make no mistake, the sector has problems. For one, rising interest rates motivate investors to dump dividend-heavy stocks such as food and beverage firms. The sector has gotten crushed over the past 12 months, and Pepsi has significantly outperformed.
That could change though. Consumer and dietary trends continue to serve as a longer-term headwind for PEP stock. Soda sales are in seemingly terminal (albeit gradual) decline in North America and Europe. And while Pepsi’s snack foods are holding up better, nutritional preferences and government regulation, via tools such as fat taxes, could sting here as well.
Pepsi still has great brands, but with many of its peers trading under 15x earnings now, it’s worth asking if PEP stock should still trade at 20x.
Stocks to Sell Now: Simon Property Group (SPG)
Source: m01229 via Flickr (Modified)
At least as far as Wall Street goes, the Retail Apocalypse has been postponed. A couple of somewhat better quarters for retailers, both mall and free-standing, has put the “e-commerce killing brick and mortar retail” discussion on hold. That doesn’t mean that the story is over, however.
And yet, judging by Simon Property Group (NYSE:SPG) — America’s largest mall operator — you’d think good times were here again. SPG stock, which careened downward from $225 to $150 in recent quarters, is now back over $180. And yet, while the bad news has slowed down in the mall space, it’s hard to say that the coast is clear. Major department store chain Bon-Ton had to shut down its operations earlier this year. Sears Holding (NASDAQ:SHLD) and JC Penney (NYSE:JCP) keep putting up dismal results and their stocks plummet ever-lower. Numerous in-line retail tenants also remain in significant trouble.
That’d all be fine if Simon were priced as a bargain. But at 15x funds from operations — high for a normal REIT let alone a shopping REIT in the days of ecommerce — the valuation is aggressive. The dividend yield of 4.4% is also insufficient for either a mall operator or a REIT in a time when in interest rates are surging.
Some malls will continue to prosper in the future, but Simon stock is priced much too optimistically now. In all likelihood, you can sell it at these levels and buy it significantly cheaper when the next recession hits.
At the time of this writing, Ian Bezek held no positions in any of the aforementioned securities.