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.
Five Below (FIVE)
One-Month Return: +54.5%
Often facilitating a treasure hunt shopping experience, Five Below (NASDAQ:FIVE) is an American discount retailer that sells a variety of products from mobile phone cases to candy to sports equipment for largely $5 or less.
Why Is FIVE Not Exciting?
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Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
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Modest revenue base of $3.88 billion gives it less fixed cost leverage and fewer distribution channels than larger companies
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Underwhelming 10.4% return on capital reflects management’s difficulties in finding profitable growth opportunities, and its shrinking returns suggest its past profit sources are losing steam
Five Below is trading at $105.19 per share, or 20.9x forward P/E. Read our free research report to see why you should think twice about including FIVE in your portfolio, it’s free.
Zurn Elkay (ZWS)
One-Month Return: +26.4%
Claiming to have saved more than 30 billion gallons of water, Zurn Elkay (NYSE:ZWS) provides water management solutions to various industries.
Why Are We Cautious About ZWS?
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Organic sales performance over the past two years indicates the company may need to make strategic adjustments or rely on M&A to catalyze faster growth
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Estimated sales growth of 3.5% for the next 12 months implies demand will slow from its two-year trend
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Issuance of new shares over the last five years caused its earnings per share to fall by 8.2% annually, even worse than its revenue declines
At $37.54 per share, Zurn Elkay trades at 27.6x forward P/E. Dive into our free research report to see why there are better opportunities than ZWS.
Perma-Fix (PESI)
One-Month Return: +17.8%
Tackling hazardous waste challenges since 1990, Perma-Fix (NASDAQ:PESI) provides environmental waste treatment services.
Why Is PESI Risky?
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Sales tumbled by 7.3% annually over the last five years, showing market trends are working against its favor during this cycle
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Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
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Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders