Despite positive sentiment following Nvidia’s (NASDAQ:NVDA) earnings, investors are looking for overvalued stocks to sell as signs of excess optimism start to show.
The latest U.S. Purchasing Managers’ Index (PMI) surveys came in hotter than expected, showing that both manufacturing and services inflation remained high. This spooked investors and sent stocks tumbling. Given the persistent inflation pressures in the PMI data, traders are rethinking the odds of a Federal Reserve interest rate cut in the coming months.
Savvy investors have seen the warning signs: the S&P 500’s price-to-earnings (P/E) ratio sits above historical averages, retail investors pour money into risky assets like meme stocks and equity valuations remain lofty. While one might argue optimism can persist, valuations do have limits.
To identify which overvalued stocks to sell as a correction unravels, investors analyze whether fundamentals like the P/E ratio, earnings-per-share (EPS) and profitability justify valuation metrics.
As such, we have identified three sky-high stocks you should consider dropping from your portfolio as soon as possible based on stretched valuations, deteriorating fundamentals, or technical indications screaming sell.
Macy’s (M)
Macy’s (NYSE:M) is a major retail player that owns and manages department stores. The company faces declining sales and weak consumer spending. Macy’s stock trades at an extreme premium to its peers and has barely made any profits. Its P/E ratio of 668x is 37 times the industry median of 18.45x, while diluted EPS declined 61% from 56 cents to to 22 cents as net income fell by 60%.
The company reported better-than-expected Q1 earnings results on Wednesday, May 22. However, the results beat meager expectations as Macy’s continues its turnaround efforts amid stagnant U.S. retail sales. While management is attempting to right the ship, investing in 50 pilot stores as part of the turnaround strategy has resulted in just a 0.3% increase in sales from these stores.
Despite the weak balance sheet, Macy’s shares rose about 3% following its announcement to raise full-year guidance to between $22.3 billion and $22.9 billion from $22.2 billion to $22.9 billion. Moreover, Macy’s stock price has soared over 80% since it bottomed out last November. The recent increase has brought its 14-day relative strength index (RSI) to 58. This is almost 10% above the industry average of 49, positioning Macy’s at an alarming distance from its 52-week average of $22.10.
The inflated valuation metrics and Macy’s bleak growth prospects make this one of the overvalued stocks to sell at current levels. Next quarter growth estimates see an 85% decline compared to the S&P 500’s 11% gain. It might be too late to sell then.
Vizio Holding (VZIO)
Vizio Holding (NYSE:VZIO), a smart TV maker that went public in 2021, has seen its stock price climb over 50% since February. This came after Walmart (NYSE:WMT) agreed to acquire the company for $2.3 billion to accelerate its advertising business, Walmart Connect. However, Vizio disclosed that the Federal Trade Commission (FTC) had requested additional information from both companies, implying an in-depth antitrust review of the deal. This can potentially delay the deal for months or years or even block it.
Several indicators suggest Vizio’s share price has outpaced its fundamentals while uncertainty around the deal remains. Vizio’s P/E ratio currently stands at 132x, surpassing the S&P 500’s 27x by about five times. This is the case despite revenue growth declining for seven straight quarters. The company also reported an EPS loss of six cents in early May. Yet, it still trades shy of its 52-week high of $11.28, below the $11.50 Walmart promised.
While Vizio’s Platform+ business grew strongly year-over-year (YOY), weaker-than-expected TV unit sales and pricing led to an overall revenue miss and losses for the quarter. With inflation stubbornly higher, consumers may pull back discretionary spending on high-ticket items like smart TVs even more as the summer holidays approach.
Analysts expect Vizio’s growth to continue slowing over the next quarter, dropping 43%. At its current valuation, Vizio likely needs to post annual growth of at least 15-20% to justify its stock price.
For investors who have enjoyed hefty gains in Vizio stock over the past year, this is now considered one of the overvalued stocks to sell and take profits on time.
Carvana (CVNA)
Carvana (NYSE:CVNA), the alternative company to dealerships that sells used cars online, has seen its stock price skyrocket over 850% in the past year. However, it lacks profitability, and due to reporting an EPS loss of 41 cents, its P/E is absent. Carvana’s high debt levels and lack of consistent profitability indicate that it is more of a “meme stock”. Notably, almost 28% of its shares are shorted.
Several signs point to Carvana being highly overvalued as it trades at $110 per share, 10% above analysts’ estimates. Carvana’s price-to-sales (P/S) ratio currently stands at 1.56x, which is twice the industry average of 0.82x and well above its historical average. At the same time, the company’s rising debt and interest expenses continue to eat into the company’s operating profits while revenues remain below costs. Without a clear path to profitability, it will be difficult for Carvana to sustain its current valuation for much longer.
Despite its innovative e-commerce model, the company narrowlyavoided bankruptcy last year by restructuring its debt. It still faces increasing competition from traditional dealers and new entrants in the used car market.
Although it beat revenue estimates in its early May Q1 earnings report, investors should consider adding CVNA stock to the list of overvalued stocks to sell. This is especially true asauto loan default is at its highest in 13 years due to borrowers falling behind on high-interest payments.
On the date of publication, Stavros Tousios 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.