2023 has ended up being a solid year for stocks. Despite inflation, war, and other worrisome headlines, the market indexes managed to shrug off the negativity and appear set to close the year near the highs.
With the rally, however, some stocks have run far ahead of their fundamental underlying value. These three S&P 500 stocks, in particular, have become massively overhyped and are trading far above a reasonable fair value calculation. It’s time to take profits on these names before the buzz fades for these three S&P 500 stocks.
Chipotle Mexican Grill (CMG)
Chipotle Mexican Grill (NYSE:CMG) has been one of the market’s most surprising stocks over the past 20 years. Who would have imagined that burritos, guacamole, and other such Mexican foods would be the foundation for one of the all-time great growth investments?
However, investors appear to be getting carried away with CMG stock in 2023. Shares are up a shocking 60% year-to-date. Let’s be clear: Chipotle is not some small enterprise anymore; the company has a market capitalization of $60 billion and operates more than 3,300 stores.
This is a mature business with much slower growth prospects than it had a decade ago. Realistically, how many more new stores can Chipotle open every year now? It’s a good business, there’s no doubt about that. But it’s not some hypergrowth story anymore, either. After 2023’s massive run, Chipotle shares go for more than 50 times forward earnings. That simply doesn’t make sense for such a large restaurant company.
Transdigm (TDG)
Transdigm (NYSE:TDG) is a company that makes aircraft parts and components.
This may sound like a staid business. However, Transdigm has delivered stellar returns through a unique approach. The firm is a mergers and acquisitions machine, constantly doing new deals to bring additional aircraft parts companies into its fold. Secondly, Transdigm uses a ton of leverage on its balance sheet which magnifies gains during good times but could be risky in an aviation bust. It also pushes up prices aggressively, which has led to some allegations of price gouging.
On the leverage point, Transdigm stock dropped by two-thirds in a few weeks during the onset of the COVID-19 pandemic. However, aviation bounced back relatively quickly as did TDG stock which trades at new all-time highs.
That seems a touch too optimistic, as shares are currently going for 44 times current earnings. The airline industry has recovered and Transdigm is performing well. But this could be near the top of the current cycle. With TDG stock up a shocking 64% over the past year, it’s time to ring the register.
Micron (MU)
Memory semiconductor firm Micron (NASDAQ:MU) has had a volatile ride in recent years.
The memory market is known for its dramatic boom/bust cycle. There used to be many competitors in this field, which would lead to drastic swings in supply whenever industry conditions changed. However, after several previous busts, many weaker companies merged or went out of business entirely.
This supposedly created a new and improved memory market where the survivors, like Micron, would enjoy large and stable profits. Indeed, Micron saw its revenues surge to a record level in 2022 as the consumer electronics market showed strong demand for memory solutions.
But rumors of the cycle’s demise were overblown. As it would turn out, as soon as computer and smartphone demand rolled over in 2023, so did Micron’s business. The company lost a large sum of money in 2023, and its guidance for the first quarter of 2024 projects a dismal gross margin of approximately 0% and a loss of a dollar per share in earnings.
Despite Micron’s bad 2023 and rough prospects for next year, traders have already bid MU stock up dramatically. Yes, Micron and the memory cycle will eventually turn back up. But there’s no reason for Micron shares to be up 50% year-to-date given its checkered history and poor outlook for next year.
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.
