The U.S. economy as a whole is performing very well, with the labor market remaining very strong. Additionally, GDP continues to expand rapidly, powered by large increases in personal consumption. Of course, that positive macro situation creates an environment in which many if not most stocks can thrive. However, since some sectors are struggling, or could easily start to do so soon, there are still many stocks for investors to avoid.
Also noteworthy is that there are many overvalued stocks to be concerned about, either because they’ve been bidden up to irrational levels, or because Wall Street is choosing to ignore obvious red flags these companies are exhibiting.
With that said, here are seven overvalued hot stocks that I believe are well-positioned to tumble, robbing many shareholders of their hard-earned money.
Online auto dealer Carvana (NYSE:CVNA) has soared 40% over the last month, and is up an incredible 444% so far this year, bringing its enterprise value to a rather high $11.2 billion, at the time of writing.
Analysts, on average, expect the company’s top line to come in at $11.86 billion next year, meaning that its forward enterprise value-revenue ratio is a bit under one, which is actually fairly low.
However, analysts on average expect the retailer to lose $4.60 per share in 2024, exacerbating the company’s already-high debt total of $9 billion. Moreover, given the stock’s gains, profit taking is likely to put downward pressure on CVNA stock sooner than later.
And, in ominous news for Carvana, Yahoo Finance recently reported that, in the U.S., “an oversupply of vehicles will lead to a price war that sends prices plummeting.” If such a situation materializes, Carvana will likely have to reduce its prices, further cutting into its margins and causing losses to soar.
Pepsi (NASDAQ:PEP) is one of the consumer staples stocks whose valuation has reached ridiculously high levels due to radically overdone fears about a U.S. recession. Specifically, the beverage-and-snack maker has a forward price-earnings ratio of 25.2-times. That’s very far above the S&P 500’s average multiple of 16-times, and is very rich, considering that Pepsi is never going to generate tremendous growth or unveil a new product that takes the world by storm.
Indeed, analysts, on average, expect its revenue to climb a significant, but not very impressive, 4.9% in 2024.
Also noteworthy is that, according to Simply Wall Street, Pepsi insiders unloaded $23 million of the company’s stock over the last year. These transactions suggest that the firm’s insiders view PEP stock as overvalued.
Finally, Wells Fargo and RBC Capital raised their price targets on PEP stock to $196 and $178, respectively, in April. However, PEP stock closed at $185.60 on July 3, suggesting the name won’t climb much further going forward.
The valuation of iconic electric-vehicle maker Tesla (NASDAQ:TSLA) has once again reached likely excessive levels. After having rallied 127% so far this year, TSLA stock now carries a massive price-earnings ratio of 82.3-times, almost five-times higher than the S&P’s mean multiple of 16.3-times.
The automaker delivered a record number of EVs in the second quarter, but its deliveries increased just 10% versus the first quarter. Moreover, investment bank Bernstein wrote that “Despite significant price cuts and quarter-end promotions in the second quarter, lead times on all Tesla models are low.” In other words, buyers of Tesla EVs do not have to wait long to have their vehicles delivered, indicating that “deliveries were greater than orders,” as Barron’s explained, and that the demand for its vehicles is not exactly overwhelming.
Also noteworthy is that Chinese EV maker Xpeng (NYSE:XPEV) in May indicated that its self-driving system is at least 12 months ahead of Tesla’s. This comes as I’ve heard no meaningful, positive news about Tesla’s full-size truck, the Semi, since it was launched back in December. Finally, Tesla’s “Full Self-Driving” system continues to be controversial, and Washington can crack down on it at any time.
However, given the Biden administration’s tremendous hostility to cryptos, Washington is already pouring cold water on the idea of a Bitcoin ETF, as two regulators “reportedly had concerns over the initial filings…as being unclear and incomplete.”
Further, as I noted in a previous column, the SEC’s lawsuit against COIN will likely force the company “to give up one of [its main] businesses, greatly reducing its revenue and causing its already high losses to surge tremendously.” And another lawsuit launched by 11 states forced the firm “to produce evidence that it ‘should not be directed to cease and desist from selling cryptocurrencies in those states.’”
But with the Fed poised to raise interest rates once or twice more this year, higher rates could put downward pressure on home sales.
Moreover, there are indications that the overall housing market is not actually that strong, as existing home sales were basically unchanged in May versus the same period a year earlier. Notably, “the median existing-home sales price edged lower year-over-year for the fourth consecutive month.”
And while new home sales surged 12.2% in May versus April, OPEN’s bread and butter is “flipping” existing homes. Thus, the overall data suggest that the firm’s outlook is not very promising.
Clorox (NYSE:CLX) is another staples company whose valuation has become excessive due to overdone fears about a recession. In fact, the company’s shares have a forward price-earnings ratio of 29-times, close to double the S&P’s mean price-earnings ratio of 16-times.
Meanwhile, investment bank Argus notes that “As benefits from the pandemic have subsided, inflation has put [Clorox’s] sales and margins under pressure. The company’s revenue has fallen from peak pandemic levels, with sequential declines in five of the past eight quarters.”
Notably, the midpoint of the company’s 2023 guidance range calls for only 1.5% sales growth, prompting investment bank CLSA to downgrade the shares to “sell” on May 3.
Both of the deals will help Lucid’s finances, and likely help keep it in business for at least a few more years. But neither of the transactions materially change the automaker’s key problems – the lack of buzz surrounding its vehicles, incredibly tough competition in the luxury consumer EV space, and the lack of strong demand for its EVs.
Meanwhile, Lucid has a ridiculously high trailing price-sales ratio of nearly 16-times. As a result, Lcuid is definitely one of the top stocks to avoid in the EV sector and the market overall.
On the date of publication, Larry Ramer held a SHORT position in COIN and a LONG position in XPEV. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.