Blue-Chip Bubble Trouble: 7 Stocks to Short as Valuations Stretch to the Limit

Stocks to sell

If you’re wondering which overvalued blue-chip stocks to ditch right now, look no further. The best investors pay attention to a stock’s valuation. Warren Buffett famously avoids buying stocks that are trading at more than 15 times future earnings estimates. Any stock with a higher multiple is too expensive for the Oracle of Omaha. Buffett’s most recent stock purchase, Swiss insurer Chubb (NYSE:CB), is trading at a price-earnings (P/E) ratio of 11 times future earnings forecasts.

Within the benchmark S&P 500 index, the average P/E ratio is currently just over 27, having risen along with the bull market that began 18 months ago. Stocks are compared to the average multiple to determine whether they are expensive relative to their peers. Some stocks justify a high valuation due to their strong earnings growth and share price appreciation. Others are dangerously overvalued and destined for a correction.

Here is blue-chip bubble trouble: seven stocks to short as valuations stretch to the limit.

Overvalued Blue-Chip Stocks: CrowdStrike Holdings (CRWD)

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Shares of cybersecurity firm CrowdStrike Holdings (NASDAQ:CRWD) have performed well, rising 120% in the past 12 months, including a 40% gain on the year. In the last five years, CRWD stock has increased 444%. While the share price appreciation has been impressive, the growth has made CrowdStrike a very expensive stock to own. The company’s shares are currently trading at 950 times future earnings estimates.

Some investors might feel the premium valuation is justified as CrowdStrike continues to grow at a brisk clip. CRWD stock rose 23% in one day during March after the company reported fourth quarter 2023 financial results that beat Wall Street estimates and raised its forward guidance. On an earnings call, management reiterated their goal of achieving $10 billion in annual recurring revenue by 2030.

While CrowdStrike has been one of the best performing cybersecurity stocks, there’s no denying that the shares are expensive right now. The company next reports earnings on June 4.

Palantir Technologies (PLTR)

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Data analytics company Palantir Technologies (NYSE:PLTR) is also richly valued, trading at 165 times future earnings forecasts. Like CrowdStrike, Palantir stock has been a strong performer, rising 43% in the past year and climbing 26% so far in 2024. However, the valuation on PLTR stock is starting to look stretched with the shares trading at such a high multiple relative to earnings expectations.

The Denver, Colorado-based company recently reported EPS of 8 cents, yet its stock is trading at nearly $21 a share. While the company has posted a profit for six consecutive quarters, analysts are raising concerns about the lofty valuation. The high P/E ratio is the main reason why there is a consensus “hold” rating on Palantir stock among 12 Wall Street analysts who cover the company.

Palantir builds artificial intelligence (AI) software for governments and corporations, and its stock looks to have gotten caught up in the AI trade this year, pushing up the valuation.

Overvalued Blue-Chip Stocks: Chipotle Mexican Grill (CMG)

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Ahead of its upcoming 50-for-1 stock split, one of the biggest in market history, Chipotle Mexican Grill (NYSE:CMG) is trading at a lofty valuation for a quick service restaurant chain. Currently, CMG stock is trading at 67 times future earnings forecasts. That compares to a valuation of 21 times earnings estimates for rival McDonald’s (NYSE:MCD). Not only does Chipotle have a high valuation but its share price is out of reach for many investors trading at more than $3,100.

The stock split is meant to help with the affordability of Chipotle’s shares. However, the valuation is likely to remain rich as investors pay a premium to own the fast-growing restaurant chain that specializes in Mexican cuisine. CMG stock has grown 52% in the last 12 months, bringing its five-year growth rate to 375%. Chipotle has been one of the best-performing stocks to own in the restaurant sector.

While CMG stock has been rallying leading up to the stock split on June 26, there could be a selloff after the split is executed. Investors should proceed with caution.

Advanced Micro Devices (AMD)

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Believe it or not, shares of Advanced Micro Devices (NASDAQ:AMD) are more expensive currently than archrival Nvidia’s (NASDAQ:NVDA) stock. AMD stock is trading at a P/E multiple of 247. That compares to 65 times forward earnings estimates for NVDA stock. Of course, Nvidia just reported that its profit rose more than 600% in the first quarter from a year earlier.

Advanced Micro Devices has gained the high valuation partly from its own earnings growth, and also because of lofty expectations for the company’s new AI microchips. AMD is seen as the main challenger to Nvidia in the fast-growing market for AI chips and semiconductors, where global demand is exploding. In the last 12 months, the share price of AMD has increased 36%. Through five years, the stock is up 523%.

Overvalued Blue-Chip Stocks: Robinhood Markets (HOOD)

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Shares of online brokerage Robinhood Markets (NASDAQ:HOOD) have exploded over the last year as a bull market in both stocks and cryptocurrencies has investors trading more. In the past 12 months, HOOD stock has gained 127%, outpacing most other equities. The rocketing share price has pushed Robinhood Markets’ P/E ratio sky-high. It’s at a point where Robinhood stock is trading at 141 times future earnings.

The pricey valuation comes as investors cheer the brokerage and its financial results. On the back of strong trading activity, Robinhood recently reported record first-quarter financial results. The company singled out crypto trading on its platform as being largely responsible for its strong financial results. Cryptocurrency transaction revenue more than tripled in Q1 from a year earlier. In the last month alone, HOOD stock has risen 17%.

Eli Lilly And Co. (LLY)

Source: Vi

Pharmaceutical giant Eli Lilly and Co. (NYSE:LLY) has a big catalyst with its weight loss drug Zepbound. Robust sales of the weight loss medication have powered Eli Lilly’s sales and stock to new heights in recent months. In the past year, LLY stock has climbed nearly 90% higher. That brings the stock’s five-year appreciation to almost 600%. The sharp rise in the share price has led to a significant increase in the stock’s valuation.

Currently, LLY stock is trading at 118 time earnings estimates. That compares to a P/E ratio of less than 10 for rival Johnson & Johnson’s (NYSE:JNJ) stock. Pharmaceutical stocks are known for having low P/E multiples. This begs the question of whether the valuation of Eli Lilly’s stock is justified? Analysts seem to feel it is given that Zepbound is expected to post sales of more than $1 billion in its first year on the market, and it could become the biggest-selling drug of all time.

Overvalued Blue-Chip Stocks: Fair Isaac Corp. (FICO)

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Fair Isaac Corp. (NYSE:FICO), the leading credit scoring agency in the U.S., has been a consistent, long-term winner for investors. FICO stock has risen 22% this year, 75% over the last 12 months, and 367% in the past five years. The company’s near monopoly on credit scoring services in the U.S. has led to consistently strong earnings growth and a stock that seemingly always rises. But that growth has made Fair Isaac’s stock expensive.

Today, FICO stock is trading at 72 times future earnings estimates. While the Bozeman, Montana-based company has a market capitalization of $34 billion, it is currently trading at a higher multiple than most of the Magnificent 7 mega-cap tech stocks that have market caps above $1 trillion. There’s no question that shareholders pay a premium to own Fair Isaac stock. But the company’s growth and competitive position in the marketplace help account for the rich valuation.

On the date of publication, Joel Baglole held long positions in NVDA, LLY and FICO. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

Joel Baglole has been a business journalist for 20 years. He spent five years as a staff reporter at The Wall Street Journal, and has also written for The Washington Post and Toronto Star newspapers, as well as financial websites such as The Motley Fool and Investopedia.

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