When it comes to stocks, I tend to be a glass-half-full kind of person, which is why I don’t often write about stocks to sell.
Alas, you can run, but you can’t hide. So I’ve been asked to come up with 10 names I feel investors ought to jettison before they crash and burn.
What kind of stock fits this description? All kinds of possibilities come to mind.
High fliers that are overbought. Meme stocks. Takeover targets. Spinoff candidates. I could go on for hours.
One of the last times I wrote about stocks to sell that I can think of was in October 2019. I haven’t checked how the stocks have performed in the 22 months since. But a quick look at the names suggests most have gone on to have good performances despite my concerns.
As I said above, I’m more comfortable recommending stocks to buy than those to sell.
For this article, I’ll use price-to-free-cash-flow and price-to-sales as my metrics, selecting a diversified portfolio of stocks to sell that have gotten ahead of themselves relative to their historical valuations.
None of my recommendations should necessarily be construed as negative on the company but rather current valuations.
- Alcoa (NYSE:AA)
- Globalstar (NYSEAMERICAN:GSAT)
- Skechers (NYSE:SKX)
- Celsius Holdings (NASDAQ:CELH)
- Occidental Petroleum (NYSE:OXY)
- Tradeweb Markets (NASDAQ:TW)
- Apollo Medical Holdings (NASDAQ:AMEH)
- TFI International (NYSE:TFII)
- Extra Space Storage (NYSE:EXR)
- Microvision (NASDAQ:MVIS)
Stocks to Sell: Alcoa (AA)
Price-to-Sales: 0.67x
Price-to-Free-Cash-Flow: 59.9
Ever since Alcoa became an independent company in November 2016, spun off from Arconic (NYSE:ARNC) into a vertically integrated aluminum producer, it’s been the tale of two tapes.
First, there was its run to $60 in April 2018, followed by a major correction to around $5 less than two years later. Today, it’s climbed out of its hole — up 62% year-to-date (YTD) through July 22 and 192% over the past year — Alcoa is trading at about 60x trailing 12-month (TTM) free cash flow (FCF).
There is no question that business is good for Alcoa. On July 15, it reported better than expected second-quarter 2021 earnings. Its EBITDA (earnings before interest, taxes, depreciation, and amortization) in Q2 was $618 million, better than the $600 million analysts were expecting in the quarter.
Goldman Sachs believes aluminum prices will average 2,450 per metric ton in 2021. Further, aluminum is on a multi-year run. Post-Covid, we’ll see if its predictions hold up.
Flipping its FCF, AA has an FCF yield of 2.2%. Shareholders better hope Goldman Sachs is right. Otherwise, Alcoa is definitely overvalued.
Globalstar (GSAT)
Price-to-Sales: 19.4x
Price-to-Free-Cash-Flow: 108.7x
Globalstar is a provider of mobile satellite services such as two-way voice and data transmission. Its services are used by companies and organizations operating in hard-to-reach areas of the world.
Launched in 1991, it’s had a tough go until this year. Its stock’s has taken off like a rocket. In June alone, it gained 11.3%. Up 318% YTD, its three-year annualized total return is also good at 48.4%. However, a $10,000 bet on GST over the past decade would have earned you about one-seventh the return of the entire U.S. market.
The enthusiasm for GSAT is starting to grow. The Reddit crowd have jumped on its bandwagon and analysts have started to take notice — B. Riley analyst Mike Crawford calls it a buy with a target price of $3.25, more than double its current price — but the reality is that its stock’s more expensive than it’s been in many years.
Still losing money on a GAAP basis, it’s ready for a cooldown.
Stocks to Sell: Skechers (SKX)
Price-to-Sales: 1.5x
Price-to-Cash-Flow: 18.7x
The global footwear company reported record Q2 2021 sales on July 22 that included a 31.7% sales increase over its Q2 2019 results and 127.3% over last year. It had earnings of 88 cents-per-share on the bottom line, a light-and-day improvement over it’s 44 cent loss-per-share in Q2 2020. Margins were up across the board.
So it makes sense that SKX has gained 49% YTD and 77.6% over the past year. Investors are rewarding the company for a job well done. But, unfortunately, my experience with Skechers is that it doesn’t seem to stay on a run for an extended period.
In July 2018, I said SKX was a buy in the $20s. In the low $20s, it was an “absolute” buy. It proceeded to fall into the low $20s before recovering in 2019. It got crushed in the March 2020 correction but has more than doubled since.
Every time it gets above $40, it delivers some bad news to knock the stock back into the $20s. Above $51 as I write this and trading at almost 20x FCF, history suggests it’s getting ready to lay an egg.
Celsius Holdings (CELH)
Price-to-Sales: 32.6x
Price-to-Cash-Flow: N/A
In November 2020, I called the functional beverage maker a micro-cap stock to buy and hold for the next 10 years. I was convinced that as its gross margins improved and gained market share in the U.S., I suggested that CELH stock would double in 2021.
Well, it hasn’t quite hit that mark. It’s up 30.9% YTD and 371.0% over the past year. I’m probably going to regret my sell call, but the fact it isn’t up by more, seven months into 2021, suggests the bloom is coming off its rose.
Celsius reported Q1 2021 results on May 13. There was good news and not-so-good news in the report.
In terms of revenues, they grew by 78% during the quarter to $50 million, with 78% of its sales in North America. So, the U.S. is becoming a bigger piece of the pie. That’s good.
Unfortunately, gross margins fell by 400 basis points to 49.5%. That’s not the right direction.
Ultimately, I think Celsius has a shot a being a billion-dollar brand. It’s got some great backers — Hong Kong billionaire Li Ka Shing owns 8.94%, and Kimora Lee Simmons owns 5.33% — but for now, I think its valuation has gotten ahead of its growth.
The $40s would be a better entry point.
Stocks to Sell: Occidental Petroleum (OXY)
Price-to-Sales: 1.5x
Price-to-Cash-Flow: 7.02x
Despite the fact the oil and gas exploration and production company’s stock is up 56% YTD and 61% over the past year, it’s got a long way to go to get to $59.62, the exercise price for Warren Buffett’s warrants to purchase 83.86 million shares of OXY stock.
Buffett got those warrants when he bought $10 billion in preferred shares from the company to help finance its takeover of Anadarko Petroleum in August 2019, a takeover that most experts consider to be a failure.
The reality is that oil prices have come a long way over the past year — a barrel of West Texas Intermediate (WTI) has more than doubled to $71.91 as I write this — and yet the company’s $36 billion in long-term debt is still 1.4x larger than its market capitalization.
The only way OXY stock gets to $60 is if a barrel of oil gets to $100. It could happen because the demand over the next decade is expected to grow substantially.
In the meantime, Occidental has a lot of work to do to shore up its balance sheet. Should the price of oil not cooperate and head back into the $60s, OXY stock is all but dead in the water.
Tradeweb Markets (TW)
Price-to-Sales: 18.47x
Price-to-Cash-Flow: 33.0x
I honestly can’t remember if I’ve ever covered Tradeweb, an operator of electronic marketplaces for financial institutions. Yet, I feel like I should have. Through 2020, it’s grown its revenues for 21 consecutive years. Soon, it will hit $1 billion in annual revenue. Through Q1 2021, it has TTM revenue of $930 million.
So, why do I think it’s a sell?
Tradeweb went public at $27 a share in April 2019. In 28 months, TW stock has gained 140%, 40.5% of those returns in 2021. The stock’s valuation is more expensive than it was at its IPO.
Tradeweb was valued at $6 billion when it went public in April 2019. Based on $371 million in 2018 revenue, it had a P/S ratio of 16.17x, about 12% less than its valuation today.
I don’t think there’s any question it’s got an excellent business. Unfortunately, I don’t see it continuing the run it’s been on in the past 28 months.
Stocks to Sell: Apollo Medical Holdings (AMEH)
Price-to-Sales: 6.4x
Price-to-Cash-Flow: 67.1x
The California-based provider of medical care joined the S&P SmallCap 600 Index on June 15. It replaced Callaway Golf (NYSE:ELY), which was promoted to the S&P MidCap 400 Index at the same time. In addition, Callaway replaced Grubhub, which was purchased by Just Eat Takeaway.com (NASDAQ:GRUB).
Being added to a broad market index provides a short-term boost as institutions buy the stock to reflect the changes to their index portfolios. In the case of Apollo, it gained 17% on the news. YTD, it’s up 504% and 564% over the past year.
In fact, Apollo’s been on a roll since hitting a low of $9.49 during the March 2020 correction. From its low to today, it’s appreciated by almost 800%.
My biggest concern is that its TTM revenue through the first quarter ending March 31 was $692.7 million, 35% higher than in 2018. That’s good but hardly worth nearly 800% gains over the past 17 months.
Either AMEH grows into its currently inflated valuation, or it takes a tumble. I believe the latter is in store over the next 6-12 months.
TFI International (TFII)
Price-to-Sales: 2.42x
Price-to-Cash-Flow: 15.4x
Back in the days when I wrote about Canadian stocks for a living, TFI International was one of my favorites. I recommended it in September 2017 when it was trading around 30.75 CAD. It’s up over 300% in less than four years. YTD, it’s doubled.
TFI CEO Alain Bedard is one of the best executives in North America. He allocates capital better than most, and he’s a solid operator as well.
In April, TFI acquired UPS Freight for $800 million. The company rarely made money under UPS (NYSE:UPS) ownership. Bedard’s gone to work in the three months since closing its acquisition to turn around the business, which is now called TForce Freight.
While its Q2 2021 results will likely give the stock a temporary boost, its stock has come a major distance since its March 2020 lows. Valued at 2.42x sales — approximately three times its five-year average — there is absolutely no room for error.
I like it but not at these prices.
Stocks to Sell: Extra Space Storage (EXR)
Price-to-Sales: 16.1x
Price-to-Cash-Flow: 28.4x
I don’t know a lot about Extra Space Storage, but I know that it owns, partly owns or manages 1,969 self-storage properties. These properties generate 21% year-over-year growth in funds from operations (FFO), which explains how it has increased its dividend by 70% over the past five years.
Founded in 1977 by current Chairman Ken Wooley, it’s become a pure-play worth owning in the self-storage industry. Interestingly, 50% of its 943 wholly-owned locations are equipped with solar power. So it continues to lead the way in green energy.
It’s got properties in virtually every region of the country, serving more than 1.1 million customers across the U.S. As a result. It considerably outperforms its peers.
Naturally, that deserves a premium valuation.
However, up 47.3% YTD, and 78.9% over the past year, EXR has gotten ahead of itself. It now trades on a P/S basis, approximately 50% higher than its five-year average. It’s had two significant corrections since June 2016. I’d expect a third soon.
It’s due.
Microvision (MVIS)
Price-to-Sales: 965.3x
Price-to-Cash-Flow: N/A
InvestorPlace’s Louis Navellier stated in early July that Tesla’s (NASDAQ:TSLA) flirtation with Lidar (light-detecting and ranging sensors) is proof Microvision’s technology has potential.
“I think Microvision’s lidar solution has real potential to pay off. Currently, this name earns a “B” rating in Portfolio Grader,” Navellier said on July 3.
On July 2, I suggested that investors interested in Microvision should look at Luminar Technologies (NASDAQ:LAZR) instead. My argument was based on the fact Luminar’s insiders had a lot more skin in the game.
In every way, I argued, Luminar is a better bet. It trades at 387.1x sales. Like MVIS, it uses free cash flow rather than generating it. It is down 48.2% YTD compared to a 155.8% gain for Microvision in 2021.
If you own Microvision, my advice is to sell now before investors come to their senses and buy LAZR and/or ARK Autonomous Technology & Robotics ETF (BATS:ARKQ) with your proceeds.
On the date of publication, Will Ashworth 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.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.