Before diving into the discussion of overvalued stocks due for correction, we need to establish one thing about this list: every company you see here represents a fundamentally sound business. In other words, the focus of this narrative centers on trimming exposure. We’re absolutely not here to discuss shorting embattled organizations, which is a different topic for a different day.
While arguably most people define market success as picking winners, the holistic definition also involves knowing when to get out while the going’s good. Whether we’re talking about virtual currencies or high-flying stocks to crash, practically every tradable asset moves in cyclical fashion. So, when your holdings appear too overheated, it may be time to let go.
Another advantage of trimming risky overhyped stocks centers on the cyclical discount mechanism. If you manage to sell your hot holdings at or near the top, you can always buy back the same security at a lower price. With that, here are some good names that just extended themselves a bit too much.
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At first glance, Trade Desk (NASDAQ:TTD) wouldn’t seem an ideal candidate to short and that’s because it’s not. Since the beginning of this year, TTD shot up nearly 59%. A technology firm that empowers buyers of advertising, Trade Desk revolutionizes the space through its self-service, cloud-based platform. Here, ad buyers can create, manage and optimize digital advertising campaigns across ad formats and devices.
Still, one of the fundamental risks that might make TTD one of the overvalued stocks due for correction is the digital ad market itself. With consumers struggling with both inflation and record-high household debt, people have trimmed their discretionary spending. In turn, advertisers may continue to respond, leading to a potential downward cycle.
Also, the financial realities are difficult to ignore. Thanks to TTD skyrocketing recently, it sports hefty premiums. Right now, shares trade at a trailing multiple of 466.53. They also trade at a forward multiple of 214.36. Against operational metrics, the market prices TTD at 21.07-times trailing sales. As a result, it might be one of the high-flying stocks to crash (at least temporarily).
First Solar (FSLR)
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Headquartered in Tempe, Arizona, First Solar (NASDAQ:FSLR) is a leading global provider of comprehensive photovoltaic (PV) solar solutions, which use its advanced module and system technology. Further, the company’s integrated power plant solutions deliver an economically attractive alternative to fossil-fuel electricity generation today. Clearly, the retail investor community responded vigorously to First Solar’s potential. Since the Jan. opener, FSLR popped up nearly 39%.
However, investment resource Gurufocus warns its readers that the enterprise may be significantly overvalued. A major clue that FSLR could be one of the overvalued stocks due for correction centers on operations. Presently, the company suffers a three-year revenue growth rate of 5.5% below zero. Also, its operating margin sits at 7.25% below breakeven.
To be fair, First Solar’s strong cash-to-debt ratio of 6.17 suggests a catastrophic implosion is not on the table. Nevertheless, FSLR’s trailing multiple stands at nearly 519. Now, its forward multiple is more manageable at 25.16, but this too is a bit worse than middling. With a staggering price-earnings-growth ratio of 42.54, FLSR might be one of the risky overhyped stocks.
Penumbra (PEN)
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Based in Alameda, California, Penumbra (NYSE:PEN) is a global healthcare company focused on innovative therapies. Per its public profile, the company designs, develops, manufactures and markets novel products and has a broad portfolio that addresses challenging medical conditions in markets with significant unmet need. As with the other overvalued stocks due for correction, investors responded positively to PEN. Since the start of the year, shares soared over 40%.
While enjoying various scientific relevancies, not every financial metric undergirding Penumbra favors PEN stock. For example, its three-year EBITDA growth rate slipped to 19.4% below zero. And both its operating and net margins rank slightly better than sector average.
Most worryingly under the context of high-risk stocks to crash soon, PEN incurs hefty premiums. As an example, the market prices shares at a forward multiple of 258.11, worse than practically every other company in the medical devices and instruments segment.
Also, PEN trades at 13.32-times sales and 11.6-times book value. Both rate as significantly overvalued relative to industry norms, making it one of the stocks with potential downfall.
Rambus (RMBS)
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Hailing from Sunnyvale, California, Rambus (NASDAQ:RMBS) is a provider of industry-leading chips and silicon intellectual property making data faster and safer. Leveraging 30 years of advanced semiconductor experience, it’s a pioneer in high-performance memory subsystems that solve the bottleneck between memory and processing for data-intensive systems. Since the beginning of this year, RMBS shot up over 87%.
Again, we’re talking about a relevant organization with solid financials so you shouldn’t short RMBS. For example, Rambus commands an Altman Z-Score of 22.06, indicating high fiscal stability and extremely low risk of bankruptcy. Also, its three-year revenue growth rate clocks in at 26.5%, beating out 81% of its rivals.
However, investors pay more than a pretty penny for that performance, making RMBS one of the overvalued stocks due for correction. Specifically, RMBS trades at 15.48-times trailing sales, worse than 89.68% of the competition. Also, for good measure, Gurufocus labels Rambus significantly overvalued. With a price-earnings ratio of 133.77, RMBS may be one of the high-flying stocks to crash.
Vita Coco (COCO)
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Founded in 2004, Vita Coco (NASDAQ:COCO) develops, markets, and distributes coconut water products under the brand name Vita Coco in the U.S., Canada, Europe, the Middle East and the Asia Pacific. Loved by its legions of loyal fans, Vita Coco offers a variety of flavors and product categories, including coconut oil, coconut milk, sparking water and a natural energy drink. Since the Jan. opener, COCO skyrocketed 94%.
Undeniably, the brand carries significant influence. Better yet, it prints several positive financial metrics. Notably, its cash-to-debt ratio clocks in at 676.28, beating out 94.23% of companies listed in the (non-alcoholic) beverage space. Also, its Altman Z-Score of 18.75 means that Vita probably won’t face a bankruptcy hearing anytime soon.
However, the issue that makes COCO one of the overvalued stocks due for correction is the underlying premiums. For instance, COCCO trades at 74.76-times free cash flow. In contrast, the sector median value is only 20.82 times. As well, the market prices COCO at nearly 47-times forward earnings. As a discount to projected earnings, Vita Coco ranks worse than nearly 93% of the field.
Maui Land & Pineapple (MLP)
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Based in Hawaii, Maui Land & Pineapple (NYSE:MLP) is a landholding and operating company dedicated to agriculture, resort operation and the creation and management of holistic communities. Maui Land owns approximately 22,000 acres on the island of Maui, where it operates the Kapalua Resort community. Given resurgent travel interest, MLP has attracted attention. Since the start of the year, shares popped up nearly 25%.
To clarify, Maui Lands represents an outstanding enterprise financially. Therefore, investors shouldn’t think about shorting MLP stock. For example, the company incurs zero debt, affording it excellent flexibility during these uncertain times. As well, its Altman Z-Score clocks in at 14.95, indicating extremely low risk of bankruptcy.
However, investors again pay for the performance. Maui’s three-year revenue growth rate impresses at 27.3%. Unfortunately, MLP trades at 10.95-times sales, worse than 86% of its peers. As well, it trades at a trailing multiple of 237, worse than over 97% of its peers. Thus, it’s one of the overvalued stocks due for correction.
TRX Gold (TRX)
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Headquartered in Oakville, Ontario in Canada, TRX Gold (NYSEAMERICAN:TRX) specializes in the precious metals mining sector. According to its public profile, TRX is building a significant gold project at Buckreef in Tanzania with its joint venture partner Stamico. Since the beginning of this year, TRX gained almost 27% of equity value.
However, shares trade hands at only 44 cents a pop. That right there is a big clue that TRX may qualify for overvalued stocks due for correction. Unfortunately, such speculative entities print unpredictable dynamics. Sure enough, in the trailing one-month period, TRX slipped 18%.
Even with that “discount,” TRX seems incredibly pricey. For example, shares trade at 221.5-times trailing earnings, ranking worse than 99% of the metals and mining industry. In fairness, TRX trades at a forward multiple of only 4.48. However, its difficult to give much credence to this stat considering its consistent net losses.
As well, its PEG ratio stands at 8.39 times. In contrast, the sector median value is only 0.85 times, ranking worse than 97.63% of the competition. Thus, TRX might be a candidate for high-flying stocks to crash.
On the date of publication, Josh Enomoto 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.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.
