There are a few reasons to believe that now is the right time to readjust your portfolio away from certain overvalued stocks. For one, AI-heavy tech stocks are propping up a recent surge in the markets. That suggests that investors may soon pare off non-AI tech companies that remain overvalued, at any moment.
Two, the summer months are historically weak for markets. June, August, and September have proven to be the weakest months for equities. Theories about why that’s the case generally center on the idea that institutional traders tend to be on vacation throughout the summer. There’s less activity leading to lower liquidity and increased risk. Whether that’s the primary culprit or not, the pattern is real. So, now’s the time to consider selling these overvalued stocks, before the rest of the market does.
| CRM | Salesforce | $215.31 |
| GOLD | Barrick Gold | $17.00 |
| ZM | Zoom Video | $67.14 |
Salesforce (CRM)
Salesforce (NYSE:CRM) is the dominant name and stock in the customer relationship management niche. The company has established an enviable position relative to most other firms vying for their share of the software market. At the end of the day, Salesforce controls roughly 30% of the space.
Its next 10 competitors control a smaller share of the market combined. That impressive positioning has led to a situation in which CRM shares have become wildly overpriced. Saleforce’s price-to-earnings ratio is currently 560-times. That’s higher than all but 1% of its software industry competitors. It’s difficult to see why that should be sustainable for the company or investors. One of the few logical arguments is simply that it has traded above the 1,000-times threshold in the past.
Nevertheless, 560-times earnings is too high. If that doesn’t dissuade investors from selling CRM stock, its history of value destruction should. Salesforce creates almost no return on capital invested, at 0.66%. Yet, that capital has an average cost of 11.4%. That’s the definition of value destruction, making this among the most overvalued stocks I think is worth selling right now.
Barrick Gold (GOLD)
Barrick Gold (NYSE:GOLD) has only very recently become overvalued. The gold mining firm boasted a mundane valuation based on price-to-earnings ratios that isn’t likely to raise any eyebrows.
But at the beginning of 2023, that rapidly changed, as its price-earnings ratio began to skyrocket. It first spiked to 70-times, after having stayed in the teens for years. Then it jumped to approximately 300-times, which is where it now stands. The problem is the combination of significantly lower earnings for Barrick Gold, which posted earnings per share of $0.07 in the first quarter, and a relatively stable valuation. Notably, this earnings per share drop was drastic, considering the $0.25 reported in the same quarter the year prior.
Notably, Barrick has been able to maintain its valuation as a result of increased interest in gold as a store of value this year. Recession concerns are driving investors to speculate on gold, as questions about the value of the U.S. dollar grow louder. The combination of those factors has left GOLD stock highly-overpriced, even as its gold production slows.
Zoom Video (ZM)
Zoom Video (NASDAQ:ZM) is stabilizing after the stock exploded during the pandemic and then imploded during the hangover. Revenues have fallen over the last five quarters, but the company’s online revenue is expected to reach $480 million in the second quarter and remain there for the company’s fiscal year.
That is being heralded as a sign of stability for the video call giant. But enterprise sales are weakening, and that will matter. That’s especially true, in light of the fact that Zoom recently fired 1,300 workers. Those already declining enterprise sales are likely to get worse given that there will be fewer employees to sell the company’s services to enterprises moving forward.
The company was already shedding enterprise accounts, which generally bring in large revenues. That’s another reason to be wary of ZM stock. The company grew wildly throughout the pandemic, but that isn’t enough to substantiate the company now. It’s also not a reason to continue holding Zoom Video in your portfolio. In other words, sell ZM stock.
On the date of publication, Alex Sirois 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.
