The stock market is going straight up. The longer the rally goes on, the more confident traders tend to become.
In this environment, almost anything seems possible. The good times will keep rolling, and everything will turn out well in the end.
However, the market can pull the rug out from under folks just when things are at peak sentiment. Just think back to 2022, when the bottom suddenly fell out of SPACs, EV companies, meme stocks, and other former outperformers.
This is to say that while the party is still going strong, investors should keep a wary eye on the exits. There’s an awful lot of froth out there, and these three overhyped stocks to sell look especially vulnerable.
Royal Caribbean (RCL)
Royal Caribbean (NYSE:RCL) is one of the world’s largest cruise lines. After a harrowing experience during the pandemic, the cruise industry has come roaring back to life as consumers have let loose in what some people have described as “revenge spending.”
This has led Royal Caribbean’s revenues and profits to exceed pre-pandemic levels now, and the stock price has also reached new heights. In particular, RCL stock is up more than 50% over the past 12 months.
However, the move in the stock has gotten seriously excessive. Remember that Royal Caribbean increased its fully diluted share count from 210 million in 2019 to 283 million now, as it had to sell lots of stock at low prices during the pandemic to keep the lights on.
The company’s long-term debts surged from $8 billion pre-pandemic to $20 billion at year-end 2023. Throw in much higher interest rates, and Royal Caribbean’s interest expenses have soared.
Investors are extrapolating the cruise industry’s record 2023 results into the future and assuming the best. But tourism is a cyclical business. When another recession hits, revenues will get slammed again. Given Royal Caribbean’s troubled balance sheet, the stock is vulnerable to a massive downside once sentiment starts to turn.
Seagate Technology (STX)
Seagate Technology (NASDAQ:STX) is a leader in the data storage industry. STX stock has enjoyed an incredible recovery over the past year, with the stock price rising 70%.
This comes even as the company’s business is in a massive bust. Revenues were running around $10 to $11 billion annually between fiscal year 2019 and fiscal year 2022. Sales plunged in 2023; however, the demand for consumer electronics such as laptops and smartphones plunged.
Specifically, Seagate’s revenues fell more than 25% to $7.4 billion for fiscal year 2023, and analysts foresee another drop to just $6.5 billion for the current year. Seagate has veered sharply into unprofitable territory.
This could be quite a problem for the company, given its massive $5.67 billion debt load, much of which carries uncomfortably high interest rates. Analysts are hopeful that Seagate will return to modest profitability in 2025, but that would barely move the needle given the size of Seagate’s debt load.
Put another way, traders are betting on a huge recovery in the memory market. This may or may not happen; only time will tell. However, STX stock has already priced in the positive outcome at this price and would be set to get utterly crushed if the cycle doesn’t turn as quickly as expected.
Wingstop (WING)
Wingstop (NASDAQ:WING) keeps on flying. The fast-food chicken restaurant chain’s stock has risen 400% over the past five years, including a 125% gain over the past 12 months alone.
To be fair, Wingstop is delivering excellent results. In the most recent quarter, same-store sales grew a sizzling 21.6% and the company opened dozens of new locations. It has about 1,400 new store locations in the pipeline, dramatically expanding the company’s footprint.
That’s where the good ends, however. The core problem is that WING stock is now at 125 times forward earnings. Shares also go at a stunning 27 times enterprise value to sales (EV/S) ratio, a figure so high it’d make the average software company blush.
Despite the company’s massive growth rate, shares are still going for more than 100x estimated 2025 and 80x estimated 2026 earnings, respectively. These figures are astronomical. Any disruption to the business, be it increased competition, a recession, or poorly chosen new store locations, could cause shares to plummet.
It’s time to stop the insanity and dump this scorching hot stock before investors get burned.
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.