Even after some recent correction, the S&P 500 index is not far from all-time highs. With the possibility of rate cuts, there is a reason to remain bullish on equities. However, I would prefer to be cautiously optimistic than very aggressive as an investor. In line with this view, it makes sense to sell overvalued growth stocks.
It’s worth noting that the market goes through phases of wealth creation and wealth erosion. The drawdown in bear markets can be minimized if investors stay away from or sell overvalued stocks. It makes sense to hold some cash and park some money in low-beta stocks.
This column discusses three overvalued growth stocks likely to correct by 30% in the next few quarters. I must mention that these stocks represent companies with strong fundamentals and a healthy growth outlook for the long term. A 30% correction would, therefore, be a good opportunity to consider fresh exposure.
Intuitive Surgical (ISRG)
Intuitive Surgical (NASDAQ:ISRG) is a manufacturer and provider of healthcare equipment. The company claims to be the global technology leader in robotic-assisted, minimally invasive surgery. With a big addressable market globally, there is no doubt about the potential the company holds.
However, it’s worth noting that ISRG stock has trended higher by 40% in the last 12 months. Currently, the healthcare stock trades at a forward P/E of 72.4. Clearly, valuations are stretched. It makes sense to wait for a deep correction before fresh exposure.
It’s worth noting that Intuitive Surgical reported earnings per share of $1.46 for Q1 2024. On a year-on-year basis, the EPS increased by 23.7%. That would imply a price-earnings-to-growth ratio of 2.9 and underscores my view on stretched valuations.
In terms of positives, the number of da Vinci Surgical Systems installed in hospitals globally continues to swell. That has translated into a sustained increase in recurring revenue. Further, of the total 9,203 da Vinci system installed base, 5,385 are in the United States. There is ample scope for penetration in Europe and emerging markets.
Coinbase Global (COIN)
Coinbase Global (NASDAQ:COIN) has rallied by almost 150% in the last 12 months on the back of cryptocurrencies trending higher. It’s, however, worth noting that COIN stock traded at highs of $283 in March. There has been weakness in the stock as valuations look stretched, and I expect further correction from current levels of $245.
An important point to note is that higher trading and speculation activity is a key growth driver for Coinbase. However, there has been some disappointment on that front in the recent past.
Crypto trading volume declined by 21.8% in June, which was the third month of decline. It’s worth noting that combined spot and derivatives trading volumes across centralized exchanges were $4.2 trillion in June. In comparison, trading volume in March was $9 trillion. That will impact Coinbase results for Q2 2024 and it makes sense to exit before the numbers are declared.
I believe that trading volumes will pick up in the coming quarters. A potential catalyst is a rate cut likely to translate into higher liquidity in the financial system. A deep correction in COIN stock would therefore present a good buying opportunity.
Loar Holdings (LOAR)
Loar Holdings (NYSE:LOAR) is a relatively new listing that has surged higher. The company is a manufacturer and seller of aerospace and defense components. After listing at $28 in April, LOAR stock has more than doubled to current levels of $59. While the business holds potential, a forward P/E of 142 is an indication that the stock is overvalued.
In recent news, Loar Holdings announced the acquisition of Applied Avionics for a cash consideration of $385 million. The latter is a manufacturer of highly engineered avionics interface solutions. The acquisition will likely support growth with sales and adjusted EBITDA guidance of $40 million and $21 million for the year, respectively.
It’s worth noting that Loar has completed 16 acquisitions since 2012. Further, between 2012 and 2023, revenue growth has been at a CAGR of 38%. The company, therefore, has an impressive track record of growth. I expect the positive momentum to sustain, but it makes sense to buy LOAR stock at lower levels.
On the date of publication, Faisal Humayun did not hold (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.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.