Growth stocks are at crossroads, with investors starting to sell. After a tremendous rally over the past year, growth stocks cooled off in April as traders reassessed their prospects heading into the summer months.
Traders are seemingly concerned that high inflation readings may cause the Federal Reserve to forgo previously anticipated interest rate cuts. At the same time, economic data is starting to cool off, suggesting that the so-called economic soft landing may be in doubt. This indicates that a more bearish scenario such as stagflation may come to the forefront.
All else equal, growth stocks prefer a lower interest rate environment with greater access to capital to fund expansion efforts. Thus, this recent macroeconomic twist is not particularly favorable for the category. It remains to be seen how growth stocks will fare, and the upcoming presidential election adds another question mark to the mix.
In any case, for investors looking to trim their exposure, the following three names that are strong standouts as growth stocks to sell. All three of these growth stocks have rallied more than 50% year-to-date and seem dramatically overvalued and are at risk of a major correction.
MicroStrategy (MSTR)
MicroStrategy (NASDAQ:MSTR) is a long-running software company. In recent years, however, it has primarily transitioned to being a Bitcoin (BTC-USD) holding operation.
Its CEO, Michael Saylor, is an extremely outspoken bull on bitcoin and cryptocurrency. He has levered up MicroStrategy’s balance sheet, issuing debt to buy Bitcoins.
During times when the price of Bitcoin is going up, this leads to tremendous gains for MicroStrategy shareholders. However, this levered strategy could lose a tremendous sum of value on even a moderate pullback in Bitcoin. In the event that Bitcoin really tanked, MicroStrategy could find itself underwater — holding more debt than it has in Bitcoin on its balance sheet.
Recently, Bitcoin rallied and MicroStrategy shares went to the stratosphere. However, cryptocurrency has pulled back from the highs and the macroeconomic environment is turning more challenging. Risk is more elevated in MicroStrategy going forward, and notably, Mr. Saylor has been aggressively reducing his position in MSTR stock.
On top of that, the company just released a terrible earnings report, with the company losing more than $8/share in a single quarter while revenues missed expectations. This highlights that MicroStrategy’s core operations have stagnated and why MSTR makes the list for growth stocks to sell.
Vital Farms (VITL)
Vital Farms (NASDAQ:VITL) is part of the better-for-you food movement.
Other players in the space such as Beyond Meat (NASDAQ:BYND) and Oatly (NASDAQ:OTLY) have seen their share prices collapse. Vital Farms has done just the opposite, however, with its shares doubling since February.
The company produces naturally raised eggs which consumers perceive to have better taste and health benefits, and also have more humane practices in how Vital Farms’ animals are raised.
Consumers have proven that they’re willing to pay a premium for these higher quality eggs. However, there tends to be limits to how far these sorts of alternative foods companies can run up. As I mentioned, other predecessors like Beyond Meat have fared poorly as long-term investments.
With the recent rally, Vital Farms is trading at 50 times trailing earnings. Even with a superior product, at the end of the day Vital Farms is still selling eggs.
There’s not a significant competitive moat here; certainly, other producers can deliver higher-quality eggs to market as well if the consumer demand is there. At this valuation and after an 80% rally, investors should be extremely skeptical of VITL stock.
Wingstop (WING)
Wingstop (NASDAQ:WING) is another sizzling growth company that is also, improbably enough, in the chicken business. The fast casual restaurant chain sells mountains of chicken wings and related products every year.
Wingstop pandemic growth was due to its focus on delivery and not investing as heavily in its on-premise restaurant locations. That ended up being ideal for the pandemic-era market conditions. It also positions Wingstop well for the current consumer focus on delivery and in-app ordering.
At some point enough is enough. Wingstop has gone up 450% over the past five years and shares are already up 51% year-to-date. This is simply unbelieveable for a restaurant chain regardless of how strong the restaurant concept may be.
Restaurant profits tend to be limited as food and labor make up a large portion of overall revenues. It generally isn’t a sound investment strategy to pay software-type valuation multiples for low-margin consumer discretionary businesses.
Wingstop is now up to more than 110 times forward earnings. This is a simply outlandish figure for a restaurant chain.
Just look at some other recent highflyers such a Starbucks (NASDAQ:SBUX) that are now seeing their share prices plunge since growth slowed down.
I’m not necessarily forecasting that Wingstop’s growth spurt is about to end. But at this sort of valuation, any sort of reversion to the mean or issues with slowing consumer spending or changes in customer behavior or preferences could cause Wingstop shares to plummet.
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.
