3 Stocks to Sell as the Fear and Greed Index Hovers on ‘Extreme Greed’

Stocks to sell

Is the stock market getting too euphoric? It’s clear that the indexes are on fire right now, and the gains seem effortless as the markets keep notching new highs.

However, sentiment may be getting out of hand. One popular measure of sentiment, CNN‘s Fear and Greed Index, has pushed into extreme readings in recent weeks. It measures a variety of different indicators, with factors like “stock price strength” and “market momentum” sitting at “extreme greed” ratings right now, though a couple of other metrics are still at “greed” or “neutral” respectively. In any case, sentiment is getting exceptionally bullish.

Historically, extreme greed readouts have often been followed by meaningful corrections. While the bull run may continue for quite a while, we should expect at least some pauses if not major pullbacks along the way.

And for these three stocks to sell in particular, valuations have reached unbelievably lofty highs, setting up the possibility of dramatic declines in the weeks and months to come.

Chipotle (CMG)

Source: Retail Photographer / Shutterstock.com

Apparently, the sky isn’t the limit for a Mexican food-themed restaurant company. Chipotle (NYSE:CMG) shares are getting spicy, with the stock up more than 75% over the past year.

However, Chipotle is also turning into a perfect example of what investor greed may look like. Chipotle has been fueled by Reddit traders that are seeking fast gains from powerful momentum stocks. So far, that has been working, especially after Chipotle just announced a mouth-watering 50-for-1 stock split.

But it’s hard to see how this growth will last. Chipotle is already becoming a saturated restaurant concept in the United States, and there is much less proof about how much legs the concept will have internationally.

Meanwhile, with the recent run-up, CMG stock is now selling for more than 50 times forward earnings. Chipotle makes great-tasting food, but that doesn’t make the stock an appetizing buy after this exponential run-up.

Costco (COST)

Source: ARTYOORAN / Shutterstock.com

Costco (NASDAQ:COST) is the perfect example of a wonderful business that has been driven to an absurd price thanks to the market’s unrelenting rally.

COST stock has soared more than 50% over the past year. This has driven the retailer’s P/E multiple up to around 50. That’s an unbelievable number for a lower-margin business such as this one where analysts see just 5 to 7% top-line growth annually in coming years.

Costco has a tremendous business model, based on its club membership model. There’s little disputing that. But at the end of the day, the company sells groceries and other essential goods, and these sorts of firms usually don’t sell at sky-high multiples. The threat of e-commerce disruption to the business model also lingers.

It’s hard to imagine that Costco’s true valuation has really grown by more than half over the past year. More likely, COST stock has run far ahead of its underlying fundamentals. And the sell-off following the company’s recent underwhelming earnings report could be just the start of a much bigger decline.

Ferrari (RACE)

Source: Hadrian / Shutterstock

Ferrari (NYSE:RACE) has been outpacing the competition in the automotive space. RACE stock is already up 30% year-to-date and has sprinted 65% higher over the past 12 months. That has been a particularly strong showing given the weakness in formerly popular electric vehicle stocks like Tesla (NASDAQ:TSLA) or Rivian (NASDAQ:RIVN) over the same time period.

Ferrari appears to be winning because of its appeal to the true luxury class. Most Ferraris tend to have a starting sale price of $300,000 or up. That puts them into a different socioeconomic level than the sorts of more affordable upscale vehicles that might be priced in high five or low six figures.

The world’s rich have done well since the pandemic, as rising asset prices have led to a strong wealth effect. Put another way, the global elites are spending money at a record pace, and thus sales of yachts, handbags and luxury vehicles like Ferrari and Lamborghini have spiked.

This sort of outsized growth is unlikely to continue indefinitely, however. And meanwhile, investors are extrapolating Ferrari’s recent growth dramatically. In fact, traders have pushed Ferrari’s P/E ratio up to more than 50 times. That’s an awfully lofty ratio for an automobile company.

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.

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