Nasdaq-listed stocks have sustained a prolonged rally in recent months, reflecting investor optimism and robust market sentiment. However, in recent days, we have seen a notable pullback in several overvalued stocks, with investors increasingly favoring value over high flyers. Many Nasdaq names have recorded ridiculous gains lately, raising concerns about their current valuations. Their gains, while impressive, might indicate that some stocks have become excessively overvalued, posing potential risks to investors.
In this article, I have picked three names within the Nasdaq index that I believe are worth selling at their current levels. Given indications of a shift from growth to value, you may find it prudent to exit these positions by the end of July to ensure a timely transition. This could help safeguard your portfolio against potential declines as the market continues to recalibrate and prioritize fundamentally sound investments over speculative high-growth plays.
Wingstop (WING)
The first stock that I think has run ahead of itself considerably is Wingstop (NASDAQ: WING). This fast-casual dining chain has carved out a niche with its delicious, cooked-to-order chicken wings, boneless wings, and tenders. Since its inception in 1994 in Dallas, Texas, Wingstop has grown rapidly, now boasting nearly 2,000 locations worldwide. The company’s streamlined menu simplifies operations and improves profitability, a strategy that has resonated well with both customers and franchisees.
In recent years, Wingstop has consistently delivered impressive revenue and earnings per share (EPS) growth. These figures have grown at a compound annual growth rate (CAGR) of 22.8% and 23.1%, respectively, over the past decade, which is a truly impressive feat. Its franchise-centric model, combined with strong same-store sales and an innovative digital ordering system, has fueled this success. Partnerships with delivery services, such as Uber Eats of Uber Technologies (NASDAQ:UBER) have further bolstered this performance, positioning Wingstop for continued growth.
However, despite its solid fundamentals and a promising outlook, Wingstop’s stock seems overly valued. The 112% rise in its share price over the past year has led to shares currently trading at 109 times this year’s expected EPS. The smallest misstep could trigger a notable pullback. Thus, even though Wingstop is likely to keep growing rapidly moving forward, it makes little sense to be bullish at today’s price levels.
Display Corporation (OLED)
Another stock that appears to have surged beyond its fundamentals is Universal Display Corporation (NASDAQ:OLED). The company leads in the organic light-emitting diode (OLED) technology space. For example, its collaboration with Samsung has been crucial in advancing OLED technology in high-end smartphones, including the Galaxy series. Also, its partnership with LG has helped drive the utilization of OLED in premium TV sets.
Due to the widespread adoption of its OLED technology globally, Universal Display has enjoyed remarkable growth in recent years. Its revenues and EPS have registered CAGRs of 13.7% and 10.3%, respectively, over the past decade. Consensus estimates project that double-digit growth in both of these metrics is set to be sustained in the coming years, too.
However, the stock has surged by about 60% over the past year and is now trading at what seems to be overvalued levels. At 16 and 46 times this year’s anticipated revenues and EPS respectively, the stock’s valuation appears too high, especially given its cyclical nature. TV and smartphone sales follow cyclical patterns, so a downturn in these sectors could lead to a drop in the company’s revenue and earnings—an impact that the current valuation appears to overlook.
Dexcom (DXCM)
The third and final stock on this list that seems to be trading at a premium is Dexcom (NASDAQ:DXCM). Dexcom is a leading player in continuous glucose monitoring (CGM) systems, which are critical for effective diabetes management. The company has developed cutting-edge CGM technology that provides real-time glucose data, significantly improving diabetes management.
To demonstrate the rapid adoption of the company’s technology, consider that over the past decade, Dexcom’s revenues have grown at a CAGR of 36.6%. As the leading player in this field, Dexcom is well positioned to maintain impressive growth, particularly given the anticipated increase in the diabetic population in the coming years. This is well illustrated in Wall Street forecasts, which suggest the company will sustain double-digit growth well into the future.
However, investors might face limited upside potential, as the stock is currently priced at 62.5x this year’s anticipated earnings. Even if DexCom continues to meet or surpass Wall Street’s forecasts, its shares could struggle to rise as it catches up to its high multiple. In fact, over the past three years, despite recording substantial revenue growth, Dexcom’s share price has remained relatively stagnant, reflecting this very risk, which could persist.
On the date of publication, Nikolaos Sismanis 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.