The stock market has had a good rally since the third quarter of 2023. Despite a downturn in January, major market indices, including the S&P500 and Nasdaq, are trading upward, adding to the significant gains accrued last year. This has, in turn, led to a rapid rise in the valuations of several stocks. If investors are not careful, they can find their portfolios hammered by a sudden devaluation in companies trading at high multiples. Here are three overvalued stocks to sell that investors are probably better off dumping now before they get burned.
Arm Holdings (ARM)
The semiconductor chip designer Arm Holdings (NASDAQ:ARM) made headlines in late August 2023 as the company prepared for its public trading debut. Ultimately, ARM raised nearly $5 billion from public markets, and after a 25% pop on its first day of trading, the chip stock commanded a valuation of around $60 billion.
For those unaware, the semiconductor company already holds the intellectual property that underpins the software and architecture used to develop systems-on-a-chip (SoCs) for smartphones, tablets and Internet of Things (IoT) devices. Moreover, Arm’s management team hopes to successfully reorient the company to play a critical role in AI chip technology. For example, the chip designer has already helped develop Nvidia’s Grace Hopper Superchip, which combines Arm’s Neoverse processor cores with Nvidia’s H100 Tensor Core GPU to achieve record performance levels.
ARM investors ended 2023 up more than 18% on their investment, and since the start of trading in 2024, the chip designer’s share price has appreciated nearly 60%. The problem is ARM is incredibly overvalued. At this point, shares are trading at 90.7x forward earnings, which means the stock is trading at nearly double its earnings per share. Unfortunately, this kind of stock is ripe for a major sell-off, especially if the macroeconomic environment doesn’t stabilize as quickly as people predicted.
Manhattan Associates (MANH)
Manhattan Associates (NASDAQ:MANH) is a leading provider of software solutions for supply chain management, inventory optimization and omnichannel commerce. Three of Manhattan’s solutions include Omnichannel Commerce, Supply Chain Execution and Supply Chain Planning. Omnichannel Commerce helps companies connect with their suppliers better while automating the purchase order process. Supply Chain Execution tools allow companies to manage their warehouses or shipyards and understand which products are where and which vehicles are in use. The last solution offers a layer of data analytics on the first two solutions, providing companies with demand forecasting capabilities.
Manhattan Associates has continued outperforming financial metrics despite receiving a “covid bump” in 2021 and 2022. The company’s revenue increased more than 21% in 2023, and Manhattan’s management team was upbeat on guidance.
However, this is a stock that investors last year have already received a hefty return on. Manhattan Associates’ shares rose by 77% in 2023 and have risen 14% since the start of the current year. Trading at 65.3x forward earnings, MANH’s shares look a bit stretched in valuation, and investors could get burned if there’s a market swing in the other direction.
Tesla (TSLA)
Tesla (NASDAQ:TSLA) is a key global electric vehicle market player. Throughout 2023, Tesla defied skeptics and broke records. In particular, Tesla’s quarterly earnings have come in above analysts’ estimates, and the price-cut strategy the automaker began to pursue in the beginning year has increased quarterly deliveries while also placing pressure on gross margins. Tesla’s Q4’2023 financial figures also beat Wall Street’s estimates. Unfortunately, the EV maker’s CEO Elon Musk shared grim guidance for Tesla and its shareholders, citing interest rates and weak consumer demand. January’s inflation data was higher than expected, which could delay interest cuts.
Moreover, Tesla faces growing competition from China’s BYD, which overtook Tesla as the largest seller of EVs in China for 2023. Further developments in this market could put pressure on TSLA in future quarters. The EV maker’s stock is also trading at 60.5x forward earnings, which could put the stock at risk of a sell-off if performance does not improve.
On the date of publication, Tyrik Torres 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.