10 Stocks to Sell Before They Give Back 2019 Gains
In 2019, investors have been looking for stocks to buy — not stocks to sell. A broad market selloff toward the end of last year admittedly created some bargains. Key sectors like energy, semiconductors and software offered their share of bargains.
This year obviously has been very different. The S&P 500 has gained 16%, and the gains have been spread across the entire U.S. equity market. Among stocks with a market capitalization over $300 million, just 559 — or 16% — are down year-to-date. A greater number of those stocks — 771 — have gained at least 30%.
In that group are some stocks that simply became too cheap amid the fourth quarter plunge. Others have soared thanks to strong performance. But there are more than a few that seem to be benefiting from market optimism — and not performing nearly as well as their share prices would suggest.
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These 10 stocks all fit that bill. All have gained at least 30% so far this year, yet for various reasons, seem like stocks to sell at the moment. And when the current market strength inevitably starts to fade, these 10 stocks may be the first to fall.
Shopify (SHOP)
Source: Shopify via Flickr
Few stocks reflect the reversal in market sentiment more than e-commerce platform Shopify (NYSE:SHOP). In late December, SHOP stock touched a nine-month low after losing 25% of its market value in just seven sessions. Since then, however, SHOP has gained nearly 90%, adding some $11 billion in market value in the process.
And yet, as I wrote earlier this month, the news surrounding Shopify stock really hasn’t been that good. 2019 guidance was seen as modestly disappointing. Competition from Facebook (NASDAQ:FB), Square (NYSE:SQ), and privately held Mailchimp seems to be intensifying.
Analysts haven’t even been able to keep up: the average price target of $189 suggests 16% downside. Yet SHOP keeps marching higher.
There is a bull case here, admittedly, and a valuable business. But at 20x+ revenue and 250x 2020 EPS estimates, perfection looks priced in – and then some. I’d call it a stock to sell.
Aurora Cannabis (ACB)
Source: Shutterstock
Marijuana stocks like Aurora Cannabis (NYSE:ACB) similarly have benefited from the stronger market, and the return of the ‘risk-on’ trade. ACB stock has gained 86% in 2019. Canopy Growth (NYSE:CGC) is up 80%, and Cronos Group (NASDAQ:CRON) 62%. Only Tilray (NASDAQ:TLRY) has been left out.
The gains across the board seem a bit much. Marijuana companies obviously have an enormous opportunity; but there’s a long road ahead. Valuations are getting stretched again. Aurora’s aggressive strategy is high-risk (if admittedly high-reward), and the steady issuance of stock and debt only adds to that risk.
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To be sure, ACB has promise, as does the sector. But the worry with Aurora Cannabis isn’t so much that the company is going to blow up — or even disappoint — but rather that the pot industry on the whole is getting overvalued. And with ACB one of the biggest gainers on the way up, it could be one of the larger losers on the way down.
Snap (SNAP)
Source: Shutterstock
Among stocks with a market capitalization above $10 billion, no stock has done better than Snap (NYSE:SNAP) in 2019. It’s not even close: SNAP stock has risen 110%, thirty points better than second-place CGC.
As I wrote this month, the optimism makes some sense. Execution looks better, and Snap has years of benefits ahead simply from better monetizing its existing users.
At the same time, however, the 100%+ gains make SNAP stock look awfully stretched. And the existing user base simply isn’t enough — even if revenue per user continues to rise. This remains a significantly unprofitable company valued at $15 billion. Certainly, there’s no shortage of those types of stocks to sell in this market — but there aren’t any others that have doubled in less than four months.
Carvana (CVNA)
Source: Carvana
Used-car retailer Carvana (NYSE:CVNA) has become one of the bigger battleground stocks in the market. The company’s online model threatens to disrupt the entire industry, which has brought buyers into CVNA stock. Indeed, Josh Enomoto this month called CVNA one of the 7 best long-term stocks to buy and hold, not long after Luce Emerson detailed the bull case on this site.
And there is an intriguing aspect to Carvana’s model. But there are also a lot of losses: EBITDA margin for 2018 was negative 10%, with guidance for -3.5% to -5.5% in 2019. Even long-term targets of 8-13.5% suggest only modest profitability.
As a result, CVNA might have its share of bulls, but it also has a heavy short interest. Some 56% of the admittedly thin float is sold short. Those shorts have been squeezed so far this year, likely contributing to the 100% gains in Carvana shares so far this year. But shorts make some good points: most notably that Carvana may be trying to take share in what is likely to be a declining market going forward.
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Meanwhile, CVNA may be one of the best performers in 2019 — but it was one of the worst performers at the end of last year, losing more than half its value in a matter of months. If the market stumbles at all, Carvana stock probably takes a tumble.
10 Soaring Stocks to Sell: Wayfair (W)
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There’s an interesting parallel between Carvana and online furniture retailer Wayfair (NYSE:W). Both companies are trying to disrupt industries based on in-person selling through online-focused models. Neither company is profitable. Shorts are targeting both stocks, arguing that growth is being bought through below-market pricing that simply isn’t sustainable.
And both stocks have soared in 2019 after falling quickly last year. W stock hasn’t quite matched that of its automotive peer, but it’s gained a handsome 64% so far this year.
Here, too, the gains look like too much. Given how cyclical the furniture industry is, investors truly have to trust the economy to assume that growth will continue. (That’s true for Carvana as well, by the way.) And in year ten of an economic expansion, that seems dangerous. Cyclical stocks in the rest of the market are being valued as if earnings are near a peak. What does that mean for a cyclical company with no earnings at all?
Conagra Brands (CAG)
Source: Shutterstock
Four months ago, Conagra Brands (NYSE:CAG) seemed to be in disarray. Investors were fleeing CAG stock, which hit a six-year low in late December. A cut to 2019 guidance raised questions about growth, and even Conagra’s ability to service debt raised in its acquisition of Pinnacle Foods.
Sentiment toward the CPG (consumer packaged goods) sector didn’t help. The plunge at industry leader Kraft Heinz (NASDAQ:KHC) cast a shadow over the entire industry. Consumer tastes simply seemed to be moving away from companies like Conagra and Kraft Heinz.
That sentiment seems to have reversed — at least in the case of Conagra. CAG stock has gained 44% so far this year. (KHC stock continues to fall, however.) A strong Q3 earnings report certainly helped the cause. But the broader worries here hardly seem assuaged. Grocery store customers like Kroger (NYSE:KR) still are struggling, and still trying to push private-label items in a bid to protect margins. Brands like Chef Boyardee, frozen dinner nameplate Marie Callender’s, and Slim Jim don’t seem likely to drive much growth, particularly among millennials.
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