Drop These 2 Hot Stocks Before You Get Burned

Discussion in 'Trading news and analysis (syndicated content)' started by StreetAuthority, May 16, 2017.

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  1. StreetAuthority

    StreetAuthority Active Member Official Contributor

    What goes up must come down. These words are true in many places, but especially in the stock market. High-flying stocks can quickly reverse, destroying portfolios and dreams on the way back down. The urge to keep holding huge gains for even more is strong in all investors. This urge is called greed and greed crushes profits.

    Controlling greed is vital for success in the stock market. The trick is knowing when to sell. Remember, no one has ever gone broke taking profits. Careful observation of internal and external factors affecting share price can provide an educated guess as to when it is time to take profits.

    2 Stocks You Need To Dump Now
    I have identified two ultra-popular, highly profitable stocks that need to be dumped now. Could these stocks continue to move higher? Sure, anything is possible in the stock market, but these two in particular show all the signs of being severely overvalued and ready to plunge. Risk-embracing experienced investors could short these monster gainers, but that's not what this article is about. This article will lay out the case for why it is time to take profits in these two favorite companies.

    Believe it or not, I do not hate either one of these firms. In fact, I think they have fantastic business models, products, and services. Just the stock price is out of line with reality and the time has come to take profits.

    1. Tesla (Nasdaq: TSLA)
    Tesla is one of the most successful public companies of the last several years. Shares of this visionary firm have rocketed over 50% this year alone. Its charismatic leader, Elon Musk, has successfully sold the public on his battery powered vision of the future. His efforts in space exploration and subterranean transportation have sparked visions of a utopian future.

    I applaud him for his accomplishments and goals; we definitely need more leaders like him to keep technology moving forward. But despite (or perhaps because of) Musk's powerful vision, Tesla stock has become wildly overvalued and will likely correct soon. Here's why:

    Over-optimistic expectations for the company. Musk has done an incredible job marketing his ideas to the public. His strategy of "anti-selling" has worked wonders in the psyches of investors. However, reality always trumps dreams over the long haul.

    Right now, Tesla is worth more than General Motors (NYSE: GM) and many bulls are expecting the company to be worth hundreds of billions of several years. Musk says the company will likely be worth more than Apple (Nasdaq: AAPL) one day. At the same time, he calls his company "absurdly overvalued" based on current valuations.

    This is amazing given that the firm just keeps losing money. This month's earnings report, released on March 3, revealed a 64% jump in vehicle production combined with a $1.33 per share loss. Greater production should not lead to higher losses. The optimistic proclamations are based on future projections that just do not match reality.

    In fact, despite being worth far more, Tesla reminds me of internet stocks just before the big dot-com crash. Many of these companies had great services and products, but they all were wildly overvalued. And we all know the end of that story.

    Noted hedge fund manager David Einhorn agrees with the short thesis. He recently stated that he does not think the company will be able to sell enough Model 3s to support the stock's valuation.

    "The enthusiasm for Tesla and other bubble basket stocks is reminiscent of the March 2000 dot-com bubble," Einhorn said. "While we do not know exactly when the bubble will pop, it eventually will."

    To make matters worse, competition is nipping at Tesla's heels. While Tesla's models are unique in the market now, nearly every major automaker will soon be releasing its version of the electric car.

    Finally, Tesla's acquisition of Solar City may turn into a huge liability for the company. Both Bank of America and Barclay's analysts have sounded the alarm over the merger, saying it places Tesla's long-term stability at risk.

    I completely expect Tesla's shares to drop 50%-plus into the $160 zone within the next 24 months.

    2. Netflix (Nasdaq: NFLX)
    The market has watched this innovative company's shares soar higher by over 70% in the last 52 weeks. Launched as the leading DVD delivery company, NFLX has morphed into a $69 billion market cap behemoth specializing in streaming video, internet TV, and content production.

    Despite its size, the company is a cash-burning machine, and its share price is simply unsustainable at the current level. Netflix is not shy about this fact, boasting in a recent press release that it plans to continue to burn cash to fuel its growth for many years. Free cash flow has been negative in a substantial way since 2013 and is expected to incinerate another $2 billion in 2017. The burn rate forces debt levels to continually spiral higher.


    Its stated strategy is to keep building content, but Netflix appears to be ignoring ramping up their revenue source (subscriptions). While content is in a constant state of improvement, subscription levels and growth have leveled off. Also, the average value of media companies is 10 to 15 times EBITDA while NFLX's EBITDA's metric is a sky high 66.

    This creates an unsustainable situation, and I forecast that NFLX will be trading near $80 per share or below within the next 24 months.

    Action To Take: Take profits in TSLA and NFLX now, before it's too late.

    Editor's Note: Ignore the hype and cash in on the headline chaos with our Top 10 "win-win" Stocks for Trump's first few years in office. Just prepare to be a little surprised...

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