3 stock market stars that could burn out fast
Pinpointing which stocks are due for a slide isn't easy, but evidence is mounting that a few companies whose shares have soared will go into reverse soon
For all its turbulence, Wall Street has held onto its summer of gains, with the S&P 500 Index trading nearly flat for the past 30 days. Investors continue to mull over big issues like the U.S. government shutdown; the Middle East; trade wars between the U.S., China and India; and AI’s impact on companies’ bottom lines.
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While many stocks have effectively been grounded by this trend, there are few high fliers, particularly in the technology sector, that are significantly outperforming the market.
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“On the surface, the U.S. stock market appears strong, trading within a few percent of all-time highs. However, my outlook is that the market is priced to perfection,” said David Jaffee, a veteran stock market analyst and founder of the options trading site BestStockStrategy. “The recent rally has been disproportionately fueled by a handful of AI and semiconductor stocks, pushing their valuations to euphoric, and frankly, unsustainable levels.”
The trend has professional money managers wondering if today’s market stars may be tomorrow’s share-price flatliners, or worse.
“Historically, even revolutionary technologies lead to bubbles where the eventual winners get dramatically overpriced before a significant correction,” Jaffee said. “That may be what happens here, especially since the market has gone up a lot over the past few years without a protracted pullback.”
Other market experts say that, based on valuations, the large cap growth sector as a whole looks to be somewhat expensive. “What stands out more is that the top 5 companies (Nvidia, Microsoft, Apple, Alphabet and Amazon) make up nearly 30% of the S&P 500,” said Joseph M. Favorito, Managing Partner, at Landmark Wealth Management, LLC. “That is the largest concentration in the top five companies since 1964.”
This doesn’t mean the big name plays have to crash. “They may continue to go up for some time,” Favorito noted. “Markets can remain irrational for a long time.”
Given the market’s fickle nature, pinpointing top-performing stocks that are due for a slide is no easy task. Yet some evidence is mounting that certain skyrocketing stocks will experience a course reversal, with these three names leading that list. (All year-to-date performances are as of October 21.)
Palantir (PLTR)
Year-to-date performance: +141%
Palantir, the Denver, Col.-based software platform specialist, has soared more than 120% this year, but market mavens don’t think it can continue like this anymore.
“It's trading at what is frankly an absolutely wild valuation, at over 200 times earnings,” said Christian Harris, head analyst at Investing.co.uk. “This jump simply isn't matched by its earnings growth. So if the AI buzz cools or profits stumble, which at least one will, Palantir could well be among the first to lose ground, and it has a lot to lose.”
Super Micro Computer (SMCI)
Year-to-date performance: +82%
Harris calls Super Micro Computer an “over-rated growth star," as SMCI shares rose significantly this year, largely thanks to AI demand. “Its margins are falling and its inventory is mounting,” he said. “If demand slows or costs remain as uncontrolled as they have been, I wouldn’t be surprised if its price stalled or dropped pretty rapidly.”
Jaffee agrees with that sentiment, adding that while SMCI is a real company with real earnings, “its valuation has reached a level that prices in decades of flawless execution."
Nvidia (NVDA)
Year-to-date performance: +31%
“In my opinion, many of the AI stocks are priced to perfection and have little or no margin of safety, including Nvidia,” said Robert R. Johnson, professor of finance, Heider College of Business, Creighton University. “The stock is trading at 339 times normalized earning an selling price to sales multiples of 26. A lot has to go right to justify those price multiples."