The stock market has gotten volatile lately. Shares dropped sharply in recent days on worries around the renewed spread of Covid-19 and its Delta variant. However, stocks rapidly rebounded as investors went bargain-hunting, particularly in Covid-impacted stocks. In any case, the stock market indexes remain fairly near their all-time highs. This makes it a good time to be thinking about stocks to sell.
It’s unclear if the Delta variant will end up causing a bigger drop in stocks in the coming days and weeks. Even if not, however, there are other potential storm clouds. The Federal Reserve has signaled that it will tap the brakes on its easy money policy. And further fiscal stimulus may hit roadblocks in Washington D.C. as well. Add it all up, and there are some stocks to sell and have cash ready before a potential correction.
These seven stocks to sell are overvalued and could face a bumpy outlook over the next few months:
- Apple (NASDAQ:AAPL)
- Zoom Communications (NASDAQ:ZM)
- BlackBerry (NYSE:BB)
- Canoo (NASDAQ:GOEV)
- Carnival Cruise Lines (NYSE:CCL)
- American Airlines (NASDAQ:AAL)
- Teladoc (NYSE:TDOC)
Stocks to Sell: Apple (AAPL)
Can it get any better than this for Apple? AAPL stock has jumped nearly 20% since the beginning of June. That’s an additional $400 billion in market capitalization to AAPL stock. If you’re wondering, $400 billion is the approximate market cap of Walmart (NYSE:WMT) or Mastercard (NYSE:MA). That’s right, Apple stock is going up so fast that it is adding the market caps of behemoth companies such as Mastercard in a matter of weeks.
This is no judgment against Apple’s business, but it probably hasn’t really appreciated $400 billion in value that quickly. Rather, traders are simply chasing AAPL stock up since it’s a safe blue chip name. In a world with rising risk factors, it makes sense that folks are gravitating to defensive names. But, once the price gets too high, even a solid company like Apple stops being a good portfolio hedge. Be careful. In a correction, AAPL stock could give back a lot of its recent gains.
Zoom Communications (ZM)
Zoom Communications is a perfect example of companies remaining overvalued due to recent events. For awhile, Zoom was a seemingly must-own stock as it was the perfect name to ride the work-from-home and remote schooling trends. Zoom had an absolutely gigantic 2020, and with good reason. The video client is fast, reliable and easy to use. It was a perfect product in a time when people desperately needed a good video solution.
Now, though, what’s left for Zoom? Anyone who was thinking about ever using Zoom or another video client already signed up last year. If a potential customer didn’t join Zoom at the height of Covid-19, what would entice them to sign up now?
Zoom is still growing its revenues for now — its most recent quarterly revenue is an improvement over both a year ago and the previous sequential quarter. However, it’s likely to fall off dramatically. Analysts see Zoom’s organic revenue growth rate falling into the teens next year and on. Meanwhile, the stock is trading around 75 times forward earnings, and earnings are expected to level off around here going forward as the company’s growth dramatically slows down.
There’s a possibility that the Covid-19 variants pick up, and we get another year of school being online. There are tail cases where Zoom still has one more burst of momentum before its momentum fades. The company also announced a large acquisition recently as it seeks to expand beyond video. That said, when you’re paying 32 times revenues for a company whose tailwind is already fading, a correction is bound to happen.
Stocks to Sell: BlackBerry (BB)
Unless you’re part of the meme stock trading community, you might not have realized that BlackBerry still has a market capitalization of nearly $6 billion. This is pretty amazing, considering the BlackBerry line of smartphones died out years ago. And it’s not like the switch to being a software business has been especially fruitful either.
Blackberry might seem optically cheap at seven times revenues. However, those revenues are rapidly shrinking. Business declined by 15.5% year-over-year in the most recent quarter. Blackberry is trying to make moves in large markets such as automotive software, but so far customers simply aren’t buying what Blackberry is selling. It makes little sense to pay this high a price/sales multiple for a business that is declining at a double-digit annual rate.
There are no earnings to fall back on either, as the company is unprofitable. The company’s balance sheet has eroded in recent years as well. Aside from the memes, there is almost no reason to hold onto BB stock at this point.
It’s easy to look at a stock price that has gone down a lot and think that the business must be a good bargain. After all, if shares were recently at $25, isn’t it a steal at $10? Not necessarily. In fact, there’s a term for this: anchoring bias. The idea is that we latch onto the first piece of information we have about a situation and weight it too heavily in our analysis.
This brings us to electric vehicle (EV) company Canoo. Shares went public via a SPAC (special purpose acquisition company) at $10. GOEV stock launched to as high as $24.90 per share, as was common for EV SPACs earlier this year. Unfortunately, for shareholders, Canoo’s business model was half-baked.
In its SPAC presentation, the company pointed to billions of dollars in future revenues from contract engineering and subscription services. The idea was that Canoo had proprietary technology that other firms would want, and that Canoo could earn a lot of money sharing this with other firms. Potential clients were rumored to include Hyundai (OTCMKTS:HYMTF) and Apple. These partnerships, in turn, would bring in early cash flow to help Canoo build its own vehicle business. However, Canoo abruptly discontinued this line of business, and its CEO and CFO resigned earlier this year. Now it’s unclear what Canoo’s future will look like.
Recall that Canoo went public at $10/share back when it still had its management team and dreams of a huge business-to-business (B2B) revenue stream. Now the contracting business is gone and the top leadership of the company left. The value of shares is clearly much less than the initial $10 offering price, if shares are worth much of anything at all. Don’t anchor onto the $25 price that GOEV stock hit fleetingly earlier this year. This is a busted stock, and shares have every reason to continue moving much lower.
Stocks to Sell: Carnival Cruise Lines (CCL)
Speaking of anchoring, we have another classic case in Carnival. CCL stock has sold off $31 to $23 in recent weeks. So it must be cheap here, right? Not so fast.
There’s a key concept called enterprise value. This is the a company’s market capitalization plus all its net cash or debt position. Carnival, as you might expect, had to issue both a ton of new stock and debt last year to fund itself during Covid-19. The company did lose $9 billion over the past 12 months after all, and it had to raise money from outside sources to replenish its coffers.
In any case, this resulted in loads of dilution to CCL stock, plus the company ending up with way more debt than it used to have. Add it all up, and Carnival is presently at a $48 billion enterprise value. Just prior to Covid-19, Carnival had an enterprise value of $40 billion. So, at today’s share price, investors are saying Carnival is worth roughly $8 billion more than it was back when the skies were clear and no one had heard of Covid-19. This seems illogical.
Carnival’s management handled Covid-19 well and kept the business intact. Last year’s massive losses didn’t wipe out the company. However, it makes little sense to think Carnival is worth more today than when Covid-19 hit. Don’t just look at the stock price, as that misses dilution and debt. When you consider the broader picture, Carnival’s valuation is much more tenuous today than it was at a higher share price years ago.
American Airlines (AAL)
Carnival is hardly the only stock where investors are too attached to the stock price rather than considering the big picture. You see it a lot in airlines as well. And American Airlines, with the worst balance sheet of the bunch, is arguably the most overvalued.
AAL stock was trading around $25/share just prior to Covid-19. It opened on July 26 at $21.75. So there’s still upside, right? Wrong.
Due to added debt and dilution, American Airlines’ Enterprise Value is now 20% higher than it was prior to Covid-19. Despite losing nearly $8 billion last year, investors are assigning a significantly higher valuation to American now than they were prior to Covid-19.
Even if the virus was totally gone already and all business travel was back to normal, this still wouldn’t make much sense. And, as it is, lingering effects of Covid-19, plus a persistent shift away from business travel will likely leave American’s earnings well below pre-Covid-19 levels for at least several years to come. The math simply doesn’t work for AAL stock at this price, and in a correction, shares could rapidly lose altitude.
Stocks to Sell: Teladoc (TDOC)
Like Zoom, Teladoc is a tech company whose best moment has passed it by. Teladoc and its recent merger partner, Livongo, enjoyed a once-in-a-lifetime opportunity during the pandemic. With a public health emergency that forced everyone to stay at home, it gave a chance for a virtual doctor service to bloom. And yet it hasn’t.
A huge problem for Teladoc is that there is little apparent moat to the business. There are a ton of start-ups targeting the same field. Outside of regulatory licensing, there aren’t many other notable barriers to entry. And it isn’t just unicorns that Teladoc is competing with. Heavyweights such as Amazon (NASDAQ:AMZN), CVS (NYSE:CVS), and Walmart are active in the space. There is also discussion around the major health insurers building their own telemedicine service. Why should a gigantic insurer such as UnitedHealth (NYSE:UNH) pay a middleman like Teladoc instead of performing this core service itself?
All told, TDOC stock is still trading at 12x revenues even after a major sell-off in recent months. 12x revenues for a company that loses tons of money and is getting pounded by competition certainly makes it a top candidate among stocks to sell. Analysts have been cutting their revenue and earnings estimates for Teladoc and that will only intensify as the telemedicine moment fades and competition continues to eat into the business.
On the date of publication, Ian Bezek 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.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.