Markets have yet to recover from the sudden dip they experienced at the start of the month, revealing how poor economic data can spook investors and impact stocks. The drop and rather slow recovery suggest investors remain cautious and may consider which stocks to sell now ahead of a potential trend resumption.
The substantial rise in the stock market over the past year was led by a few large technology companies in artificial intelligence (AI). So, AI stocks that have increased fast in recent months may be particularly vulnerable to shifts in sentiment. Some have grown over 100%, but their earnings have not matched the hype.
A typical way to evaluate whether a company is over or undervalued is its price-to-earnings (P/E) ratio. Stocks with a high P/E ratio are generally speculative, as it suggests investors are buying them in hopes of delivering strong earnings in the future. However, stocks with very high valuations could struggle now if traders adopt more conservative positions.
Additional weak economic reports in the short term may quickly shift investor sentiment about whether companies can achieve high growth expectations. This is especially true for companies that have failed to increase EPS as stock prices moved substantially higher.
The following three companies made profits that have not kept up with expectations, making them the top stocks to sell now.
Vertex (VERX)
Vertex (NASDAQ:VERX) provides tax software and tax solutions online. However, rather than describing the services in detail, it is worth noting that the VRTX stock increased 87% over the last year. This was likely due to the firm integrating AI into its products, or there may have been some confusion with Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) Vertex AI.
A few months ago, the company issued a substantial debt of $300 million which almost doubled its quarterly revenue to $161 million. While it emerged from net losses, its profit remains limited relative to the extent of its net debt. Last quarter saw $5.1 million in profit versus $334 million in total debt, with annual sales growing only 15%.
Moreover, Vertex’s current P/E ratio of 274 times is extremely high compared to the S&P 500 average of around 27 times. Despite the company showing potential, its valuation suggests it may not be the best time to invest. In fact, investors may consider it one of the stocks to sell now, given that other stocks offer better prospects.
Palantir (PLTR)
The cyber security and intelligence software company has been actively integrating AI into its services. Evidently, Palantir (NYSE:PLTR) has gotten the attention of investors seeking exposure to AI.
While its capabilities generate significant interest, Palantir’s recent quarterly performance has not kept pace with the high expectations. This is particularly noticeable when compared to the PLTR stock price.
If the company operated in a different industry, its revenue growth of 27%, as reported last quarter, could be considered solid. However, PLTR stock increased by over 90% in the same period. Even though its EPS grew from 5 cents to 9 cents and free cash flow (FCF) rose 54%, the company does not pay dividends. Additionally, its current market cap exceeds its enterprise value and its P/E ratio stands at a multiple of 172.8.
Also, analyst sentiment has turned bearish. Three analysts who updated recommendations for the firm this month all advised to sell. Given their average price target is now below the current price, PLTR appears to be one of the stocks to sell now due to its sensitivity to risk sentiment.
Monolithic Power Systems (MPWR)
Monolithic Power (NASDAQ:MPWR) provides power circuits used for cloud computing, telecom infrastructure and other industrial applications. MPWR stock surged over 30% in the last year due to expected increased demand from AI. Sales in the AI segment increased substantially but still account for just a third of total revenue. Interestingly, all other segments, like automotive, storage and consumer, saw sales decline.
Monolithic’s EPS fell slightly from the prior year to $2.06 despite the increase in its share price, which raises questions about. The rise pushed MPWR’s P/E ratio up to a multiple of 98.1, with its market cap now exceeding its enterprise value. Also, gross margin declined from 56.5% to 55.7%, showing lower profitability in the enterprise segment and failure to significantly capitalize on AI demand.
Given Monolithic’s sensitivity to the AI bubble, investors may prefer to consider MPWR as one of the stocks to sell now until financial performance improves in the next quarter.
On the date of publication, Stavros Tousios 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.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
