In This Article:
Great things are happening to the stocks in this article. They’re all outperforming the market over the last month because of positive catalysts such as a new product line, constructive news flow, or even a loyal Reddit fanbase.
However, not all companies with momentum are long-term winners, and many investors have lost money by following short-term trends. All that said, here are three overhyped stocks that may correct and some you should consider instead.
Microchip Technology (MCHP)
One-Month Return: +54.2%
Spun out from General Instrument in 1987, Microchip Technology (NASDAQ: MCHP) is a leading provider of microcontrollers and integrated circuits used mainly in the automotive world, especially in electric vehicles and their charging devices.
Why Should You Dump MCHP?
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Annual sales declines of 3.6% for the past five years show its products and services struggled to connect with the market during this cycle
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Inability to adjust its cost structure while its revenue declined over the last five years led to a 11.6 percentage point drop in the company’s operating margin
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Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 16 percentage points
At $60.80 per share, Microchip Technology trades at 53.7x forward P/E. Dive into our free research report to see why there are better opportunities than MCHP.
nLIGHT (LASR)
One-Month Return: +79.3%
Founded by a former CEO and Harvard-educated entrepreneur Scott Keeneyn, nLIGHT (NASDAQ:LASR) offers semiconductor and fiber lasers to the industrial, aerospace & defense, and medical sectors.
Why Do We Avoid LASR?
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Sales tumbled by 5.8% annually over the last two years, showing market trends are working against its favor during this cycle
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5.7 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position
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Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
nLIGHT’s stock price of $12.68 implies a valuation ratio of 2.8x forward price-to-sales. If you’re considering LASR for your portfolio, see our FREE research report to learn more.
UFP Technologies (UFPT)
One-Month Return: +14.8%
With expertise dating back to 1963 in specialized materials and precision manufacturing, UFP Technologies (NASDAQ:UFPT) designs and manufactures custom solutions for medical devices, sterile packaging, and other highly engineered products for healthcare and industrial applications.
Why Are We Hesitant About UFPT?
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Revenue base of $547.6 million puts it at a disadvantage compared to larger competitors exhibiting economies of scale
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Free cash flow margin has shown no improvement over the last five years