As September came to a close, the benchmark S&P 500 index was just a few ticks shy of returning 15% since the start of the year. That’s a very solid performance considering the prior year’s remarkable upside response to the novel coronavirus pandemic. At the same time, investors should be concerned about the specter of gambling too heavily on overbought stocks.
For one thing, it’s important to realize that even the most revered market experts could be wrong about their projections. Based on immediacy bias — defined as the tendency “to perceive immediate emotions as more intense than previous emotions” — it’s natural to assume that the market, particularly domestic blue chips, will charge higher. While that might turn out to be true, you can also end up buying overbought stocks if you let your guard down.
More critically, myriad developments suggest that the global equities sector could be due for some turbulence. Primarily, the China Evergrande (OTCMKTS:EGRNF) crisis sent a shockwave throughout the system as its much-discussed bond payments miss impugned the viability of Chinese commercial paper. Also, Reuters recently reported that the company missed a second bond payment, this time regarding offshore debt obligations. Therefore, even seemingly stable shares could become overbought stocks.
If that wasn’t enough, CNBC provided some context, noting that real estate giant Evergrande “accumulated more than $300 billion in debt” since its founding in 1996, making it “the world’s most indebted developer.” What’s worrying is that should Evergrande collapse, it would take down scores of regular individuals who had invested serious collective capital in their residential development projects. That pain could work its way into the global system, exacerbating the case for overbought stocks.
As if to heap salt on festering wounds, U.S. investors have plenty of problems to worry about, including rising consumer prices that are imposing hardships on the fragile post-pandemic recovery. Also, bitter Washington politics have erupted, which at one point threatened a government shutdown.
Against a backdrop of drama, you might want to consider trimming some of these overbought stocks:
- AeroCentury (NYSEAMERICAN:ACY)
- Choice Hotels (NYSE:CHH)
- Atlas Air Worldwide Holdings (NASDAQ:AAWW)
- CF Industries (NYSE:CF)
- Avis Budget (NASDAQ:CAR)
- People’s United Financial (NASDAQ:PBCT)
- ANI Pharmaceuticals (NASDAQ:ANIP)
Since the concept of overbought stocks can be a touchy one, let me clarify that we’re not talking about selling your entire position on these shares. Rather, it’s just wise to consider taking some profits off the table if you’re already well in the black. Remember, this isn’t about protecting a corporate brand’s honor but protecting yourself from possible volatility.
Overbought Stocks: AeroCentury (ACY)
Recently becoming one of the most troubled companies but through no fault of its own, AeroCentury had filed for Chapter 11 bankruptcy protection earlier this year due to a dramatic decrease in air travel. As an aircraft leasing company, AeroCentury is entirely dependent on consumer sentiment. When Covid-19 took that away, ACY stock quickly plummeted.
Then, in the spring, AeroCentury won a court approval to sell 10 aircraft to secured lender Drake Asset Management, per a report from Bloomberg Law. That move erased $83 million in debt. More recently, another report from the aforementioned publication stated that AeroCentury “received bankruptcy court approval for its plan to pay secured and unsecured creditors in full and hand a majority stake in the company to a group of investors.”
An intrepid group of public investors, though, have taken the above as a green light for speculation. Over the trailing six months, ACY has gained 1,400%, while over the trailing month, it’s up 56%.
Needless to say, it’s always risky betting on troubled companies. For your information, Gurufocus indicates that ACY is among the most overbought stocks, which should be red flag.
Choice Hotels (CHH)
Aside from the airliner industry, one of the other hardest-hit sectors was hospitality. Indeed, you can make an argument that the segment is worse off fundamentally than airliners because hotels and other lodgings are downwind investments: if there’s no point in traveling (due to the pandemic), then there’s really no point in booking a room.
That’s why I wasn’t exactly surprised when one of the market readers that I used to research this article identified Choice Hotels as one of the overbought stocks to be careful about. To be fair, plenty of reasons exist to support the bullish case of CHH. Mainly, retail revenge — the concept that people who missed out on important experiences last year are doubling up their spending this year — represents a big catalyst.
Also, the vaccination rollout along with a general acclimatization toward the Covid-19 crisis offer support for the optimistic storyline. However, per data from Gurufocus, analysts regard CHH as one of the significantly overbought stocks. For instance, shares trade at 56 times earnings, whereas the industry median is 25 times earnings.
Overbought Stocks: Atlas Air Worldwide Holdings (AAWW)
Moving back to the aircraft industry, shares of Atlas Air Worldwide Holdings did take a sizable hit when the coronavirus became a worldwide concern last year. However, in the bigger context, Atlas Air didn’t suffer as much compared to related companies. As an aircraft leasing service and a long- and short-term cargo specialist, the company enjoyed a dexterity that other mission-specific firms did not have.
Beyond that, when the pandemic forced passenger aircraft to convert to cargo planes, this wider move represented resourcefulness. But the advantage to AAWW stock was that the underlying firm was already prepared to serve this need. That’s one of the reasons why shares rebounded so quickly from last year’s doldrums.
However, as stock screeners go, all good things must come to an end — and that might include AAWW. Based on Gurufocus’s exclusive guidance algorithms, Atlas shares are among the overbought stocks because they’re trading above their intrinsic value.
Over the trailing month, shares have jumped 14%, which might indicate that it’s time to consider taking profits. Plus, rising consumer prices might affect the cargo business.
CF Industries (CF)
Just a few days ago from the time of writing, CNN Business published an extraordinary story, reporting how the U.K. government agreed to subsidize CF Industries, a major U.S. fertilizer manufacturer, “at a cost of several million pounds to taxpayers.” Why the gesture from across the Atlantic?
According to the piece, “CF Industries decided last week to halt operations at its UK fertilizer plants because soaring natural gas prices had made them unprofitable. That announcement sparked warnings of a food supply crisis because its plants also produce about 60% of Britain’s food-grade carbon dioxide.”
Specifically, the “gas is used to stun animals for slaughter, as well as in packaging to extend the shelf life of fresh, chilled and baked goods, and in the production of carbonated drinks. The British Meat Processors Association warned Friday that the supply shock could cause food shortages within 14 days once current stocks of CO2 gas run out.”
However, various stock screeners are urging caution as exuberance for this narrative is making CF one of the overbought stocks. CF trading at 28-times earnings puts it above the 18-times earnings for the agricultural industry median.
Overbought Stocks: Avis Budget (CAR)
Though not part of the airline industry directly, the rental car sector is nevertheless intertwined with air travel. Similar to the lodgings segment, rental cars represent a downwind investment — and that’s no pejorative when you’re talking about what was once a near-trillion-dollar arena. Unfortunately, the Covid-19 pandemic imposed a catastrophic paradigm shift, which greatly affected rental fleet operators like Avis Budget.
Fortunately, Avis Budget was able to navigate the treacherous crisis a lot better than its competitors. That didn’t necessarily mean that it was smooth sailing for the organization. For instance, in 2019, Avis generated revenue of nearly $9.3 billion. However, a year later, this tally sunk to $5.6 billion, a low not seen since the Great Recession.
But in terms of speculative value, contrarians have piled into CAR stock like you wouldn’t believe. But at what point does a contrarian investment become an expected one? Over the trailing month, shares are up 34%, which seems to stretch credulity.
Gurufocus states that it’s one of the most overbought stocks, given that CAR trades for over 48 times earnings. However, the underlying industry median is 22 times earnings.
People’s United Financial (PBCT)
During my stock-screening research, People’s United Financial came up as a possible candidate among overvalued stocks. For its part, Gurufocus describes PBCT as modestly overvalued. Trading at 11.5 times earnings, it’s not what you would call worryingly overpriced, considering that the banking industry median calls for 11 times earnings.
On a more cautionary note, PBCT trades at over 14 times forward earnings, which is significantly more than the industry, which projects just under 11 times forward earnings. So, should you sell PBCT or just ride out the noise?
Personally, despite lacking an overwhelming “paper” argument to trim some exposure, you might want to consider it based on the ambiguities of the broader economy. Admittedly, the U.S. Federal Reserve eyeing a potential interest rate hike in 2022 might benefit the banking industry. Obviously, it’s hard to do business when rock-bottom rates hamper profitability. Also, higher rates could cool down the red-hot housing market, enabling the masses to purchase homes.
However, there’s a risk that this puzzle cannot be easily solved. For instance, rising rates would likely drop housing prices but it will also skyrocket borrowing costs. Ultimately, that wouldn’t be great for a fragile banking sector, making PBCT one of the overbought stocks to be cautious about.
Overbought Stocks: ANI Pharmaceuticals (ANIP)
I’m going to finish this list of overbought stocks with arguably the trickiest name to consider trimming. Based on various stock screening services, ANI Pharmaceuticals — an integrated specialty pharmaceutical company that develops, manufactures and markets high quality branded and generic prescription pharmaceuticals — showed up as overvalued.
Based on the charts, I can understand why. Over the trailing month, ANIP gained 10%, which seems uncharacteristic for the equity unit. Up till mid-September, shares were down 6% year-to-date. Thus, the latest swing higher represented a conspicuous paradigm shift, one that should have onlookers and stakeholders considering the sustainability of this growth.
Interestingly, Gurufocus warns investors that ANIP could be a value trap. Basically, it estimates that ANIP trades for 36% below its intrinsic value, which raises eyebrows given its poor free cash flow history, softness in the balance sheet and a business that goes in and out of the black.
To be fair, ANI has generated positive news, such as receiving supplemental new drug application acceptance for its multiple-indication purified cortrophin gel. Still, stakeholders will want to verify that the recent rally is credible.
On the date of publication, Josh Enomoto 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.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.