3 Growth Stocks to Sell Now
Last year, the best-performing stocks were high-growth stocks that traded with above average price-to-earnings multiples. There is a lack of growth in the market given the relatively tepid economic environment, and so the shares of companies that actually are growing are in demand. Unfortunately, they rose too far last year, and as the economy began to show further weakness toward the beginning of this year, investors sold shares in these companies pretty aggressively.
This changed a few weeks ago. Once again we are beginning to see strength in several — but not all — of those names that investors were willing to buy last year regardless of valuation. Despite this, I think this has presented investors with selling opportunities in the following three stocks. Many of these stocks are still overpriced, and I suspect that the recent strength in these names is due to short covering. This doesn’t mean that I think these are bad investments longer term. But from a long-term standpoint, I think investors need to look for a better entry point. From a short-term standpoint I think they are vulnerable to the downside, and you have been given a good opportunity to take profits.
1. Netflix (NASDAQ:NFLX)
Netflix is a great company. It is a dominant media player that has a lot of potential to grow its business throughout the world. It is also a company with an excellent business model that gives it recurring revenues. It also has pricing power, as investors showed little concern when the company announced that it planned to raise prices.
Since bottoming toward the end of April, the stock is up nearly $80 per share, or about 25 percent. That’s great if you own the stock, but I think it is too much. The company trades at an incredible P/E multiple that exceeds 100. This is thanks to the fact that the company is growing its sales and its profit margins at a healthy pace. While I am confident that the company can keep its growth up in the near term, this growth isn’t worth such an outrageous multiple. Investors need to realize that as the company grows and saturates the market that it will not be able to grow its earnings as quickly, and as earnings growth decelerates, the price-to-earnings multiple will contract. Thus, this is a stock that is worth owning longer term, but investors need to be extremely selective when picking an entry point. Three hundred and ninety-two dollars per share is simply too much.
2. Mastercard (NYSE:M)
I really like Mastercard. The company has an incredible business model that allows it to profit from a large percentage of electronic transactions. As consumers switch from using cash and checks to using credit cards and debit cards, Mastercard stands to benefit.
As a result it has been an incredible performer, and it has commanded a premium price-to-earnings multiple. Since bottoming at $69 per share in April, the stock has risen over $7, or 10 percent. It now trades with a 28 earnings multiple. The company simply isn’t growing earnings quickly enough to justify such a multiple. Furthermore. the company’s most recent earnings report showed that there are signs of decelerating growth, and this means that we can see a multiple contraction in the near future. With this in mind, I think longer-term holders of Mastercard shares should take some profits, and those who have been looking to take a position should wait until we see lower prices.
3. Chipotle Mexican Grill (NYSE:CMG)
Chipotle Mexican Grill has been a leading restaurant stock as its fast food Mexican restaurants with an emphasis on fresh, quality ingredients have taken the nation by storm. This has sent the shares soaring over the past several years. Like with most growth stocks, Chipotle saw a sharp correction toward the beginning of the year. The stock fell from more than $600 per share in March to about $475 per share in April. With the rebound in growth stocks, the shares are nearly 10 percent higher at $515 per share.
While it has a long way to go before it hits $600, I think investors should consider taking profits now. The company trades with a price-to-earnings multiple that exceeds 40. The company’s growth doesn’t justify this. Furthermore, the company’s growth is decelerating. The company is saturating the country and it simply cannot grow as quickly as it once did. Finally, the company is suffering from margin contraction because of higher commodity prices. While management fought back by raising prices, I don’t think this is going to be enough. Finally, while Chipotle is a leading restaurant company, the fact remains that this is a very difficult industry for any company to operate in. There is a lot of price competition and an enormous number of players. All of these points indicate to me that Chipotle shares should be trading at a lower level, and now is a good time to get out.
Disclosure: Ben Kramer-Miller has no position in the stocks mentioned in this article.