Thursday, February 22, 2024
Stocks To Sell

7 Overvalued Stocks to Avoid Amid a Tricky Boom-Bust Cycle

On paper, the recovery of the benchmark S&P 500 index from its worrying lows last year implies the return of a bull market, seemingly rendering a conversation about overvalued stocks to avoid irrelevant. However, Morgan Stanley strategist Mike Wilson begs to differ. Per CNBC, market experts lauded Wilson’s correct predictions during last year’s volatility. Therefore, investors may want to hear him out again.

In short, Wilson points to his 2023 earnings forecast, which has fallen out of consensus with broader expectations for profitability. Amid the growing disparity between Wall Street’s optimism and Morgan Stanley’s pessimistic calls, the strategist remarked that many observers will be surprised at just how much earnings will fall later this year. While that might not be enough to convince you to dump out altogether, perhaps you might consider trimming high-risk overvalued stocks.

Still, Wilson also provides some light at the end of the tunnel, remarking that a rebound may be coming in 2024 and 2025. From my assessment, it appears that the analyst implies that winners and losers will materialize in the ebb and flow. To better protect yourself, you should watch out for stocks to sell in a boom-bust cycle.

Winmark (WINA)

Probably a lesser-known enterprise to most investors, Winmark (NASDAQ:WINA) is an American franchisor of five retail businesses that specialize in buying and selling used goods. However, some of the brands – such as Play It Again Sports – may be familiar to consumers. Whatever the case, WINA enjoyed a blistering start to the year, gaining nearly 51% of equity value. In the trailing year, it’s up over 83%.

Fundamentally, it’s difficult not to appreciate the sensibility of the underlying business. During a questionable economic cycle, it’s better for consumers to acquire used goods than new ones. However, even good businesses can get too heated. Regrettably, then, I’m going to place WINA on the list of overvalued stocks to avoid.

It’s not without justification. Per investment resource Gurufocus, WINA rates as significantly overvalued. While Winmark delivers on the sales growth front, it may be getting ahead of itself. Right now, shares trade at 15.59 times trailing-12-month sales, above 97.73% of peers in the cyclical retail sector. Thus, it’s one of the high-risk overvalued stocks.

Barings BDC (BBDC)

Another lesser-known enterprise, Barings BDC (NYSE:BBDC) is a publicly traded, externally managed investment company that has elected to be treated as a business development company under the Investment Company Act of 1940. Per its public profile, Barings seeks to invest primarily in senior secured loans to private U.S. middle market companies that operate across a wide range of industries.

At a cursory glance, the company doesn’t appear to be one of the overvalued stocks to avoid. Since the beginning of this year, BBDC slipped 6%. Over the past 365 days, it gave up more than 17% of equity value. Just to boot, the market prices BBDC at a forward multiple of 6.25. In contrast, the sector median for the credit services industry stands at 8.92 times.

However, against a wider framework, BBDC seems a risky bet. On a per-share basis, Barings’ three-year revenue growth rate sits at 50.8% below zero. At the same time, BBDC trades at 23.5 times TTM sales. Compared to other firms in the credit services industry, Barings ranks worse than 91.33%. Therefore, it might be one of the stocks to sell in a boom-bust cycle.

Citizens Financial (CZFS)

Headquartered in Mansfield, Pennsylvania, Citizens Financial (NASDAQ:CZFS) is a small regional bank that covers its home state, along with New York and Delaware. If you want to avoid stocks in the boom-bust cycle, it’s difficult not to have questions about Citizens. After all, the market not too long ago absorbed the failures of three regional financial institutions. Further, the AP argued last month that the banking crisis isn’t over.

To be sure, the fallout shouldn’t place every sector player under a dark cloud of suspicion. However, CZFS technically tanks among the overvalued stocks to avoid. For one thing, shares might be getting stretched in the charts. Since the start of this year, they gained nearly 14%. Over the trailing one-year period, CZFS is up almost 31%.

However, the security now trades at a forward multiple of 12.69. Compared to other entities in the banking industry, Citizens ranks worse than 90.62%. Also, while the company enjoys a better-than-average long-term revenue growth trend, CZFS also trades at 4.15 times trailing sales. This stat ranks worse than 84.12% of its peers, making it one of the high-risk overvalued stocks.

Digi International (DGII)

At a cursory glance, Digi International (NASDAQ:DGII) doesn’t seem like one of the overvalued stocks to avoid. Since the Jan. opener, DGII only moved up a little over 6%. From that narrowly defined angle, the global provider of Internet of Things (IoT) connectivity products, services, and solutions might seem a reasonable idea for speculation. However, in the trailing one-year period, DGII soared over 63%.

Further, just in the trailing month, shares gained nearly 15% of equity value. Sure enough, this caught Gurufocus’ radar, which labels the enterprise as significantly overvalued. Perhaps most glaringly, the market prices DGII at a trailing multiple of 50.67. In contrast, the sector median value sits at 20.13 times. Put another way, Digi ranks worse than 80.52% of its peers.

Also, its three-year revenue growth rate of 6.6% isn’t all that impressive, which ranks above nearly 59% of competitors. However, DGII trades at 3.23 times trailing sales. This metric clocks in well above the sector median of 1.38 (worse than 74% of peers). Thus, if you want to avoid stocks in the boom-bust cycle, Digi might be it.

Tanger Factory Outlet (SKT)

A leading operator of upscale open-air outlets, Tanger Factory Outlet (NYSE:SKT) features operating properties in 20 states and in Canada. Per its public profile, Tanger’s footprint totals approximately 13.6 million square feet, which is leased to over 2,500 stores operated by more than 500 different brand name companies. Since the start of the year, SKT gained over 21% of its equity value.

Moreover, in the trailing one-year period, shares soared to nearly 53%. As impressive as these stats are, they might represent reasons to consider SKT among the overvalued stocks to avoid. To be fair, the concept of revenge travel burns hot even this year. So, SKT “deserves” its upswing. Nevertheless, this sentiment appears to be peaking. Therefore, Tanger may require some trimming.

Looking at the financials, Gurufocus labels the business as significantly overvalued. Objectively, the market prices SKT at 5.3 times tangible book value. In contrast, the sector median value sits at 0.82 times. That means Tanger ranks worse than 98.37% of its peers. Considering the questionable economic environment we’re in, SKT may be one of the stocks to sell in a boom-bust cycle.

Opera (OPRA)

Based in Norway, Opera (NASDAQ:OPRA) is a multinational technology conglomerate that delivers fast, secure, and advertisement-free internet browsers. As well, the company offers artificial intelligence-generated digital content discovery solutions to more than 380 million monthly active users worldwide. It’s a cracker of an investment, having gained nearly 247% of equity value since the Jan. opener. At the same time, it does appear overheated.

After all, in the trailing one-year period, OPRA skyrocketed to an almost 372% return. Still, if you want to avoid stocks in the boom-bust cycle for fear of heartache, Opera seems a “great” candidate. Since its public market debut in 2018, OPRA gained just under 59%. Put another way, despite the triple-digit percentage returns, it’s basically just keeping pace with the S&P 500. In the trailing five years, the index gained just over 60%.

On the financials, OPRA trades at 49.5 times trailing earnings, which ranks worse than 77.74% of companies listed in the interactive media industry. To be fair, Opera’s a growth machine, enjoying a three-year revenue growth rate of 24.7%. However, it also trades at 6.15 times sales, whereas the sector median is 2.31 times. Thus, it’s one of the overvalued stocks to avoid.

Embraer (ERJ)

A Brazilian multinational aerospace manufacturer, Embraer (NYSE:ERJ) produces commercial, military, executive, and agricultural aircraft. It also specializes in aeronautical services. Though an exciting and relevant name, ERJ may have gotten ahead of itself. Since the beginning of this year, ERJ skyrocketed to the tune of nearly 56%. In the past 365 days, shares gained over 84% of equity value.

To be sure, strong performances alone don’t necessarily guarantee that robust enterprises become labeled as overvalued stocks to avoid. Nevertheless, Embraer faces higher risks because of its general dependency on global economic stability. With questions starting to rise in the U.S., along with a major ongoing geopolitical crisis, that stability may be far from the horizon.

Further, the financial case for Embraer doesn’t look all that enticing. Specifically, ERJ trades at a trailing multiple of 78.94. In sharp contrast, the sector median sits at 31.58 times. Therefore, Embraer ranks worse than nearly 83% of companies in the aerospace and defense industry.

While navigating overvalued stocks in the boom-bust cycle is difficult, in Embraer’s case, both the fundamentals and the multiples don’t really work out well.

WINA Winmark Corp. $358.46
BBDC Barings BDC $7.73
CZFS Citizens Financial $86.67
DGII Digi International $38.00
SKT Tanger Factory Outlet $21.51
OPRA Opera Ltd. $20.80
ERJ Embraer $16.62

On the date of publication, Josh Enomoto 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.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.

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