The market has had a good first half this year. All three major indices are in the green, with the tech-laden Nasdaq up 30% and the S&P 500 index having gained 14%. Investors have been cheering this year’s rally following the conclusion of the longest bear market since the late 1940s. But how long can the current rally last? Analysts who scrutinize the numbers are becoming increasingly pessimistic that the rally will extend into the year’s second half. Investors may want to dump these three overvalued blue-chip stocks while there is still time.
Tesla (TSLA)
Tesla (NASDAQ:TSLA) stock is flying high right now after the company inked deals with Ford (NYSE:F) and General Motors (NYSE:GM) that will see the automotive rivals pay billions to Tesla for use of its charging station network. Investors are piling into the stock on expectations that Tesla’s future earnings will get a huge bump from this new, recurring revenue stream. Sentiment towards TSLA stock has also improved since CEO Elon Musk hired a new CEO to run Twitter, freeing him up to focus more of his time and energy on the automaker.
Tesla is considered overvalued most of the time. However, things have gotten frothy with the stock in recent months and shareholders with big gains might want to take some off the table before an inevitable pullback occurs. Keeping in mind that TSLA stock plunged 65% between September and December last year before the latest rebound. Its share price is up nearly 150% this year, the stock is trading at a sky high price-earnings (P/E) ratio of 76, and its market capitalization is closing in on $1 trillion. That places Tesla at the top of my list of overvalued blue-chip stocks.
Royal Caribbean Cruises (RCL)
It’s not yet back to where it was before the pandemic, but the stock of Royal Caribbean Cruises (NYSE:RCL) has nearly doubled this year as travel demand bounces back in a big way. While RCL stock remains 30% below where it was trading at in January 2020 right before Covid-19 decimated the tourism sector, the share price is currently hovering at a 52-week high and its share price appreciation has accelerated as we’ve moved into the busy summer travel months.
Investors may want to offload RCL stock during the peak of summer before we get into autumn and face the uncertainty of the cold and flu season, as well as the potential for a renewed Covid-19 outbreak that could wreak havoc on the entire cruise line industry. Other reasons placing Royal Caribbean on the list of overvalued blue-chip stocks includes a debt load racked up during the pandemic that now stands at more than $20 billion. Additionally, earnings have only just begun to recover from the ravages of the past few years. It most recently reported a net loss of $47.9 million.
Netflix (NFLX)
Streaming giant Netflix’s (NASDAQ:NFLX) stock is also close to a 52-week high and has risen 154% in the last 12 months, including a 47% gain so far in 2023. The stock is also trading at a P/E ratio that’s nearly double the average of 25 among large cap technology companies. Much of the enthusiasm for NFLX stock is driven by expectations that the company’s crackdown on password sharing and new advertising revenue will help to lift future earnings.
While the changes at Netflix may indeed lead to an earnings boost, the company continues to face several headwinds. The strongest of these are increasing competition in the streaming space, notably from a growing number of free services, and a slowdown in global subscriber numbers. The company added 1.75 million paid subscribers in this year’s first quarter, a dramatic slowdown from the 7.66 million paid subscribers added during the fourth and final quarter of 2022. A new crop of hit shows and movies are needed at Netflix.
On the date of publication, Joel Baglole held long positions in MS and GM. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
