Although a topic that arouses myriad emotions, targeting overvalued stocks to sell represents an important component of investing strategy. Since we’re in the middle of baseball season, you can’t always let sentimental favorites dictate your lineup. At some point, age, injuries and other factors catch up with players. That’s life.
Secondly, getting rid of stocks with rising costs may ultimately protect your portfolio because other traders may be looking to unwind. Put another way, rational market participants understand that assets don’t keep rising indefinitely. Therefore, prior to a corrective phase, it makes sense to unwind overvalued entities and rotate into the less-appreciated ideas. You just want to do this first before the wave.
Finally, broader economic circumstances dictate that investors take a prudent approach with high-risk stocks to avoid. True, the labor market appears robust. However, contrasting signs such as mass layoffs and a small but conspicuous rise in the unemployment rate suggests that folks need to look out for numero uno.
Overvalued Stocks to Sell: Schrodinger (SDGR)
An international scientific software company, Schrodinger (NASDAQ:SDGR) specializes in developing computational tools and software for drug discovery and materials science. Per its public profile, multiple pharmaceutical and biotechnology firms utilize Schrodinger’s software. As well, it enjoys use among academic researchers. Undoubtedly, SDGR commands astounding scientific relevance. However, with shares skyrocketing just over 162% since the beginning of this year, it seems like one of the overvalued stocks to sell.
To be 100% clear, sell does not mean short nor does it mean that I have anything against the business. Obviously, it’s doing something right. Indeed, I wouldn’t be gung-ho about bearish trades because of Scrodinger’s fiscal resilience. For example, its cash-to-debt ratio pings at 4.55 times, better than 73.91% of its peers.
However, the market prices SDGR at a trailing-12-month multiple of 369.15, ranking worse than 98.29% of sector rivals. In addition, shares trade at 17.54 times TTM sales. Along with a premium of 5.82 times book value, SDGR simply ranks among the stocks with rising costs.
Overvalued Stocks to Sell: Trade Desk (TTD)
Based in California, Trade Desk (NASDAQ:TTD) is a technology company that empowers buyers of advertising. From its public profile, the company’s self-service, cloud-based platform, ad buyers can create, manage and optimize digital advertising campaigns across ad formats and devices. TTD caught like wildfire so far this year, with shares gaining just under 72% since the Jan. opener. Of course, this raises the specter of overvalued stocks to sell.
Fundamentally, the digital ad market came under significant pressure last year and remains a challenging arena. Now, it’s wonderful that Trade Desk has been able to swing against the grain. However, it may be time to take some profits off the table. Even if you don’t want to, other investors holding significant positions in TTD might be tempted to do just that. Once the selling pressure begins, you don’t want to end up holding the bag.
Beyond that, the red ink suggests that TTD represents one of the high-risk stocks to avoid (for now). Specifically, the market prices TTD at a forward multiple of 240.81. Stacked against its peers, Trade Desk ranks worse than 96.5% of the underlying sector. Also, it trades at 23.35 times TTM sales, worse than almost 95% of rivals.
Overvalued Stocks to Sell: Azek (AZEK)
I’m torn about Azek (NYSE:AZEK) because based on its one-year chart, it appears that shares are forming a wedge pattern; specifically a wedge with a flat upper trendline and ascending lower trendline. Look at the period between Feb. of this year to now and you may see what I’m talking about. Wedge patterns are quite powerful tools for day traders though technical analysis presents empirical questions.
On the other hand, I’m not a big fan of the fundamental implications of Azek, which is why it could be one of the overvalued stocks to sell. Per its public profile, Azek is an industry-leading designer and manufacturer of beautiful, low-maintenance residential and commercial building products. The thing is, both residential and commercial real estate suffer from overhangs related to the post-pandemic new normal.
Setting that aside, AZEK gained over 29% since the Jan. opener. In the past 365 days, shares soared over 65%. It may be due for a breather. Notably, the market prices AZEK at a forward multiple of 38.21. This stat ranks worse than 94.51% of its peers. So, unless you have evidence to the contrary, it’s one of the stocks to dump as costs rise.
Having made its public market debut in 2021, DoubleVerify (NYSE:DV) is a relatively fresh entity. Nevertheless, it’s made quite an impact. According to its corporate profile, DoubleVerify is a leading software platform for digital media measurement and analytics. Its mission is to make the digital advertising ecosystem stronger, safer and more secure, thereby preserving the fair value exchange between buyers and sellers of digital media.
On paper, it’s a very intriguing name. However, is it intriguing enough to justify an over 73% year-to-date performance? For some, it might be. I’m just starting to have my doubts; hence, my inclusion of DV on this list of overvalued stocks to sell. Again, it’s not that this company stinks. With an Altman Z-Score of 24.27, those hoping for a collapse would better spend their time waiting for a deity to materialize.
However, I’m not a big fan of the premiums on key metrics. Against forward earnings, DV prints a multiple of 60.8, well above the software sector’s median value of 26.46 times. DV trades at 13.47 times trailing sales, ranking worse than 89.87% of its peers. And it’s only priced at nearly 7 times book value. More than likely, it’s one of the stocks with rising costs to avoid.
Tyler Technologies (TYL)
Based in Plano, Texas, Tyler Technologies (NYSE:TYL) is a provider of software to the U.S. public sector. Per its corporate profile, Tyler’s end-to-end solutions empower local, state and federal government entities to operate more efficiently and connect more transparently with their constituents and with each other. An interesting tech outfit, TYL popped in recent months. Overall, shares gained nearly 23% since the start of this year.
To be fair, Tyler at first glance seems like a promising enterprise, not one of the overvalued stocks to sell. Operationally, its three-year revenue growth rate on a per-share basis clocks in at 17.2%. Its EBITDA growth rate during the same period impresses at 15.4%. It’s also been consistently profitable over the past decade, sporting above average operating and net margins.
However, the hot print regarding the multiples are problematic. Against trailing earnings, TYL is priced at a multiple of 107. Its forward price-earnings (PE) ratio is only better on a relative scale at 51.28 times. However, both stats rank far worse than their peer sets. To boot, TYL trades at nearly 9 times sales, making it one of the high-risk stocks to avoid.
Interlink Electronics (LINK)
Headquartered in Camarillo, California, Interlink Electronics (NASDAQ:LINK) is a technology company that specializes in manufacturing sensors that are used in electronic portable devices, such as smartphones, GPS systems and in industrial computers and systems controls. As one of the players focused on the Internet of Things (IoT), Interlink offers relevancies. Still, like the other companies above, you should avoid these high-cost stocks.
Worryingly, LINK is almost sure to be a volatile trade. Right now, its market capitalization sits at only $75.4 million. At any moment, shares could collapse. Of course, LINK rides a hot streak at the moment. Since the beginning of this year, it swung up nearly 44%. Most of that enthusiasm came within the past month, with shares up 29%. Unfortunately, sustainability might be an issue, making Interlink one of the overvalued stocks to sell.
Again, we have to deal with the multiples, which have soared into the stratosphere. First, the market prices LINK at a trailing multiple of 75, which ranks worse than 87.36% of its peers. Next, shares trade at 8.56 times sales, worse than 90.59% of the competition. To top it off, they also trade at 5.48 times book value, flying above the sector median stat of 1.89 times.
While the other overvalued stocks to sell on this list may arouse anger among supporters, likely few will rush to the defense of alternative investment management company Blackstone (NYSE:BX). Featuring a market cap of over $110 billion, this behemoth focuses on leveraged buyouts and commercial real estate, among other sectors. Since the start of this year, BX gained slightly over 19%.
For Blackstone, one of its main PR issues centers on its cynical methodologies. Earlier this year, a local news report in San Diego, California reported that Blackstone bought up the city’s affordable housing. Subsequently, the company turned around and hiked up rent prices. In some residential units, the rent raise came out to 43% to 64% in just two years.
So, the heck with these guys, I say. But on an objective note, it’s also fair to state that yes, Blackstone ranks among the stocks to dump as costs rise. Specifically, BX trades at a trailing multiple of 110 times, ranking worse than 94% of its peers. Also, it trades at 9.53 times book value, comparing unfavorably to 98.34% of sector players.
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.