I have a bullish view on equities as the world crawls back toward normalcy. However, there can be intermediate corrections even in the most optimistic times. It would therefore make sense to stay away from stocks that are trading at overly stretched valuations. This column will discuss seven stocks to sell into July 2021.
First and foremost, the S&P 500 Index trades at a price-to-earnings-ratio of 45.9. Clearly, the broad markets look expensive. Further, St. Louis Federal Reserve President James Bullard believes that the first interest rate hike might come as early as 2022. This is another factor that can make the markets jittery.
Additionally, the delta variant of Covid-19 is increasingly a concern. If the variant continues to be a cause of rising infections in the United States, the markets will be concerned.
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Therefore, with these possible headwinds, it might be a good time to book profits in overvalued stocks. Most of the stocks to sell that I have discussed are still worth buying on later declines.
Let’s take a deeper look into the valuation and business fundamentals of these stocks to sell into July 2021.
Nvidia Corporation (NASDAQ:NVDA)
ChargePoint Holdings (NYSE:CHPT)
Carnival Corporation (NYSE:CCL)
Stocks to Sell: Chewy (CHWY)
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CHWY stock is among the top stocks to sell at a forward price-earnings ratio of 833. The stock has corrected from highs of $120 to current levels of $81. However, valuations suggest that there might be room for further downside.
For the first quarter of 2021, Chewy reported revenue growth of 31.7% to $2.14 billion. However, the company’s adjusted EBITDA margin is at 3.6%. I believe that sustained improvement in margins is one factor that can translate into renewed upside.
It’s also worth noting that for 2020, Chewy reported free cash flow of $2 million. For Q1 2021, FCF has increased to over $59 million. To justify current valuations, FCF needs to keep accelerating in the next few years.
The company has witnessed healthy growth in active customers. Additionally, net sales per active customer have also increased. If this trend sustains, it will be positive from a margin and cash flow perspective.
In June 2021, the company’s CEO and CFO sold 169,000 and 74,610 shares respectively. CHWY stock also has an increasing short position build-up. These might be indicators of an impending correction.
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There is no doubt that NVDA stock would be worth holding for the long-term. However, for active investors, the short-term upside seems to be overdone. NVDA stock has trended higher by 24% in the last month. I expect some cooling-off and consolidation before another rally.
As an innovator, I believe that Nvidia is well-positioned to benefit from the growth in autonomous driving. At the same time, Nvidia’s artificial intelligence advancement implies application in several industries. The prominent ones are telecommunication, healthcare, robotics, warehousing and smart cities, among others.
From a financial perspective, the company’s core segments of gaming and data center have continued to deliver strong growth. Further, the automotive segment is likely to be a potential game-changer in the next few years.
For Q1 2022, Nvidia reported operating cash flow of over $1.9 billion. This would imply an annualized OCF of $8 billion. Nvidia therefore has robust financial flexibility to invest in innovation driven growth. At the same time, the company is likely to continue pursuing attractive acquisition opportunities.
According to 41 analysts tracking NVDA stock, the average price target is $737.89. Current levels of $799 might therefore be slightly stretched. However, any pull-back would be a good accumulation opportunity.
Stocks to Sell: Ocugen (OCGN)
At one point in the last couple weeks, OCGN stock moved higher by 27% on news that Ocugen partner Bharat Biotech’s Covid-19 vaccine showing 77.8% efficacy in late-stage trials.
But the rally has turned around, with the stock down over 6% in the past five days, for good reason. First and foremost, the FDA had questions on the company’s application for emergency use authorization for Covaxin. The company is now pursuing the biologics license application for its Covid-19 vaccine candidate instead of EUA.
Further, the United States has already vaccinated close to 70% of adults age 30 and older. The demand for vaccine is likely to dip in the coming quarters. The focus is likely to shift to possible booster doses. Therefore, Ocugen faces a big challenge amidst the competition.
In terms of positive developments, Ocugen has expanded commercialization rights for Covaxin in Canada. This increases the addressable market. Further, Ocugen is also targeting vaccination rights for people below the age of 18.
Another important point to mention is that Ocugen will retain 45% of the profits from sales of Covaxin. Therefore, a bulk of the profit will go to the Indian manufacturer. This limits the profitability and cash flow outlook. Overall, OCGN stock seems unattractive right now.
ChargePoint Holdings (CHPT)
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From May 2021 closing lows of $20.20, CHPT stock has rallied by 65% to current levels of $33. The valuation seems stretched and a correction is imminent.
To elaborate, the company reported revenue of $40.5 million for Q1 2021. Even if we assume an annualized revenue of $200 million, the stock trades at over 50 times 2021 revenue. Therefore, even with industry tailwinds, the stock has run ahead of fundamentals.
Among the positives, ChargePoint reported cash and equivalents of $609.8 million as of March 2021. The liquidity buffer will allow the company to aggressively expand its charging infrastructure.
In terms of geographical focus, the company has strong presence in the United States. However, ChargePoint is also expanding in Europe, which is another big market for electric vehicles. Another factor that’s positive for the long-term is growth in subscription revenue.
In the coming years, ChargePoint is well positioned for EBITDA margin expansion as recurring revenue increases.
Coming back to the valuation concerns, ChargePoint reported cash used in operations of $38 million for Q1 2021. It’s unlikely that ChargePoint will be free cash flow positive anytime soon. Once that happens, it will serve as a key stock upside catalyst.
Stocks to Sell: Carnival Corporation (CCL)
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CCL stock would also be in my list of top stocks to sell after a meaningful rally in the last 12 months. As a matter of fact, the stock has already retraced from recent highs of $31.52 to current levels of $26.
There are two fundamental factors that are likely to ensure that CCL stock remains in a downtrend. First and foremost, the company is likely to sell $500 million in common stock through “at-the-market” offering. Equity dilution would translate into stock downside.
Further, the delta variant of Covid-19 is becoming an increasing concern for the U.S. and Europe. Therefore, the outlook for the coming quarters might be uncertain. This adds to the woes for Carnival Corporation with the company already over-leveraged.
In terms of positives, there is pent-up demand for travel and leisure. Carnival Corporation is gradually resuming operations. However, another Covid-19 wave can impact growth. Further, cash burn can be extended and it might imply more equity dilution.
Therefore, it would be best to steer clear of CCL stock. The current downside might sustain well into July 2021. The stock is however worth keeping in the investment radar and might provide attractive trading opportunities.
Doximity recently launched an initial public offering with the offer price at $26. The stock witnessed a stellar listing, and DOCS stock currently trades at $50. There is little doubt that Doximity is a quality business to own. However, the stock seems to have run ahead of fundamentals.
To put things into perspective, the company reported revenue of $207 million for 2021. The stock currently trades at 48 times revenue. It would be a good idea to wait for more of a correction before considering exposure to the stock.
As an overview, Doximity is a cloud-based digital platform for medical professionals. For 2021, the company reported revenue growth of 78% on a year-on-year basis. It’s important to note that the company’s EBITDA margin was 11% in 2019. The EBITDA margin has expanded to 31% in 2021.
Further, as of 2021, the company had a net revenue retention rate of 153%. With growing adoption of the digital platform coupled with recurring revenue, the company is positioned for healthy cash flows. As a matter of fact, the company generated free cash flow of $78 million for 2021.
Therefore, the business looks attractive and can be a cash flow machine in the next few years. DOCS stock is worth adding on corrections.
Stocks to Sell: Shopify (SHOP)
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SHOP stock is another name that long-term investors can keep in the portfolio. However, traders or medium-term investors can use the recent upside to book profits. At a forward P/E of around 400, the stock does look expensive even with the company growing at a healthy pace.
For Q1 2021, Shopify reported revenue of $988.6 million. Revenue was higher by 110% on a year-over-year basis. A key business catalyst is the sustained growth in subscription services revenue.
As new customers upgrade (scaling-up) over time to Shopify Plus, the company is positioned to witness further growth in subscription revenue. This would ensure healthy EBITDA margin and robust cash flows. The company’s monthly recurring revenue growth has remained strong.
In the medium-term, Shopify is also looking at aggressive international expansion. With the pandemic shifting many businesses online, the company has a big addressable market. At the same time, addition of services like Shopify fulfillment solutions is likely to accelerate growth.
Overall, Shopify is likely to remain in a high-growth trajectory in the coming years. The business model promises to be a cash flow machine. However, that P/E indicates that some correction is due before any fresh rally.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.
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