The stock market is back on the upswing. Traders are feeling more optimistic, and perhaps with good reason. But this enthusiasm has run much too far in some sectors. These seven stocks to sell, in particular, are trading at prices far above levels that analysts consider to be reasonable. For this list, we’ll be using Morningstar analysis. All seven overvalued stocks to dump here can be found on Morningstar’s list of 1-star stocks, signifying the companies their analysts see as dramatically overvalued and set to plunge.
A lot of these companies have been excellent long-term performers and have good management teams and sound business models. However, a good company can be a bad investment if the price is wrong. And with these seven stocks to sell in May 2023, there is plenty of risk to the downside if valuations fall prey to gravity.
|Old Dominion Freight Line
|Dick’s Sporting Goods
|Church & Dwight
Stocks to Sell: Lamb Weston (LW)
Kicking off our tour of stocks to sell, let’s check in on some spuds. Potatoes aren’t generally exciting business. But investors have come rushing into french fry specialist Lamb Weston (NYSE:LW) making it one of the most successful stocks in the food industry this year.
It’s no secret that Americans love their hamburgers, and french fries are the classic side to go with burgers and other fast food. Not surprisingly, the market for frozen ready-to-cook potato products is a large one, and Lamb Weston has a leading position. Increasingly, pre-made fries have become popular in other sales channels such as grocery stores as well.
Unfortunately, investors have taken a good idea much too far. LW stock is now up more than 70% over the past 12 months. This is a rather remarkable move for a company that had struggled to grow revenues for much of the past five years. The current inflationary wave has allowed Lamb Weston to raise prices, but once economic conditions normalize, Lamb Weston’s momentum is likely to run out.
Stocks to Sell: Oracle (ORCL)
Legacy tech company Oracle (NYSE:ORCL) has surged to life in recent months. From a low of $61 last fall, shares have soared to $95. This is a big move for a company whose stock did nothing for the majority of the 2010s and which saw its revenues flatline in recent years.
The core issue for Oracle is that its main business is in decline. Oracle is the undisputed leader in on-premise databases and enterprise resource management. But demand for those services has weakened as companies move more of their workflows to the cloud.
Oracle is attempting to address this by offering its own cloud solutions. And, to its credit, Oracle has gained some traction with its own cloud business winning key customers such as TikTok. That said, cloud growth appears to be slowing down overall, at least judging by results from larger rivals such as Amazon’s (NASDAQ:AMZN) AWS.
With the overall slowdown in the tech industry, the recent bump in Oracle’s results seems unlikely to last long. Morningstar sees shares as trading at a wide 41% premium to fair value today. Oracle is another one of the top stocks to sell.
Stocks to Sell: Old Dominion Freight Line (ODFL)
Old Dominion Freight Line (NASDAQ:ODFL) is a trucking company. Many investors think of trucking as a low-margin commodity business, and that’s often true. Unfortunately, it’s another one of the top stocks to sell now.
Old Dominion has carved out a niche for itself by becoming the most successful operator in less-than-truckload cargos. This is a more specialty part of the trucking business, and Old Dominion has ridden it to great success. Indeed, shares are up a shocking 1,100% over the past decade. But investors may be giving the company way too much credit at this point. Shares are going for 29 times forward earnings, which is awfully rich for a trucking company, even a well-run one.
And economic worries will hit Old Dominion sooner or later. Its revenue growth turned negative this quarter while tonnage slumped 12%. That’s even with consumer spending trends still in decent shape. If a full-blown recession hits, look out way below on ODFL stock.
e.l.f. Beauty (ELF)
e.l.f. Beauty (NYSE:ELF) is a cosmetics and personal care company and is another one of the top stocks to sell. It is distinct from many rivals thanks to a strong direct-to-consumer approach. In recent years, as commerce has shifted from old models such as shopping malls to digital channels, investors have rewarded companies with a strong online sales channel.
Adding to that, demand for cosmetics and beauty products has soared over the past year as the economy has reopened and people have been willing to spend more on looking good. All this has added up to a remarkable comeback story for e.l.f. Beauty, with its stock rising a stunning 275% over the past year.
However, at some point, this rally will be hard to sustain. Shares are up to a whopping 65 times forward earnings at today’s price. Also, of note, the company’s stock price was essentially flat between its 2016 IPO and 2022. The company was not impressing investors or analysts for most of its history, and investors should be cautious that last year’s success may prove to be a flash in the pan. That’s especially true as the company just exited the Chinese market.
Dick’s Sporting Goods (DKS)
Dick’s Sporting Goods (NYSE:DKS) is a retailer focused on sporting and outdoor goods and apparel. The firm enjoyed a tremendous upturn in sales during the pandemic as people took up new hobbies that were socially distanced. It was a great time for activities such as camping and fishing, and people were willing to spend a lot of money given that so many alternatives were shut down.
DKS stock is up more than 350% over the past five years. That’s a wild result for what would normally be a fairly sleepy retailer. And, purely on the basis of trailing earnings, shares might still seem reasonably priced.
However, it seems that a post-pandemic hangover will be coming for sporting goods sooner or later. Profit margins are currently at elevated levels, but expect things to return to more normal levels as the sales cycle slows down, inventory builds, and Dick’s eventually has to use more aggressive discounting to sell its sporting goods. As far as worst stocks to own heading into a potential recession go, sporting goods companies would be right near the top of the list.
Mettler-Toledo International (MTD)
Mettler-Toledo International (NYSE:MTD) is an intriguing healthcare and industrial company focused on scales and measurement. It makes scales for applications such as laboratories, factories, grocery and food industry applications, and so on. It has other such items as pH meters, metal detectors, thermal analysis tools, and so on.
There’s no doubt that these are valuable mission-critical tools that serve a wide variety of applications. However, valuation is a concern. Investors are, it would seem, fully aware of the high quality of Mettler-Toledo’s business. MTD stock is trading at a lofty 34 times forward earnings. That’s a pretty hefty level for a company that has a steady business but relatively modest growth prospects. That’s especially true as the healthcare element of the business saw a boost from recent spending around the pandemic and appears to have slowing opportunities in 2023.
Morningstar has MTD stock as one of the most overvalued names that it covers. In fact, its analyst, Julie Utterback sees fair value at just $830, which would represent a massive downside from today’s $1,500 price.
Church & Dwight (CHD)
A lot of investors have been nervous about valuations in the consumer staples space. Over the past year, these companies have raised prices dramatically to benefit from the current inflationary wave. That has made for a beneficial effect on profits at these companies, and investors have bid many of them up to historically high valuations. However, there is danger in extrapolating this sort of profit growth forever.
Church & Dwight (NYSE:CHD) is one such example. The firm makes a wide variety of consumer goods such as baking powder, condoms, pregnancy tests, and air fresheners.
These are all fine products that should have a fairly steady demand. But there are limits to growth in these sorts of categories. Church & Dwight has only grown revenues at 6% per year annualized over the past decade, and yet shares are now selling for more than 32 times forward earnings. That’s quite expensive.
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.