3 Stocks That Are at Their Peak and Ready to Fall
It’s an old investing adage that investors should let their winners run. And that’s generally true. Historically, momentum has proven to be a powerful factor and stock prices that are in upward motion often tend to keep rising for a considerable length of time.
However, there also comes a time for taking profits. At some point, it simply becomes hard for valuations to expand any further, especially if sector or general macroeconomic winds are blowing in the other direction. For these three stocks to sell that have seen huge runs this year, it’s time to move to the sidelines before momentum reverses to the downside.
Costco (COST)
Costco (NASDAQ:COST) has become the dominant player in the club store category. Between consistent disciplined growth across the U.S. and strategic moves into promising overseas markets like Mexico, Costco has managed to build a tremendous store footprint while keep its profitability high.
The past few years have given Costco further opportunity to shine. The firm’s well-trained staff kept stores humming during the chaotic early days of the pandemic. And in the current inflationary environment, Costco’s commitment to maintaining low costs has increased customer loyalty.
While Costco is a tremendous company, it’s hard to see how things get much better from here. Shares are going for an aggressive 35 times forward earnings. And growth seems likely to slow given the weakening economy and fading outlook for consumer spending.
Many other consumer staples and essentials retailers have seen their share prices get hit in recent months. COST stock seems in for a round of profit-taking as well as investors digest the firm’s lofty valuation ahead of a potential recession.
Palo Alto Networks (PANW)
Palo Alto Networks (NASDAQ:PANW) is a leading cybersecurity company. It offers solutions such as firewalls, threat prevention, tracking and data loss prevention services among others.
Cybersecurity has come into increasing focus after a number of high-profile attacks. Shares of cleaning products company Clorox (NYSE:CLX), for example, got walloped after a massive “Scattered Spider” hack caused a more than 20% near-term decline in revenues. When even traditional blue chips like Clorox are getting hammered with cyberattacks, it shows the need for enhanced solutions in the space.
Unfortunately, Palo Alto shares have gotten far ahead of themselves this year. With PANW stock up 50% over the past 12 months, shares now go for a lofty 47 times forward earnings. That’s a rather hefty price tag for a mature software company that is growing at a moderate pace. Insiders just sold $19 million of PANW stock earlier this month, further suggesting that this is a good time to take some chips off the table in this cybersecurity name.
Williams Sonoma (WSM)
Home goods purveyor Williams Sonoma (NYSE:WSM) has surprised many traders this year. Shares are up over 30% over the past year and hit new highs in October.
This is a distinct change from most consumer discretionary stocks, which have seen shares slide amid inflation, supply chain ills and a slowing economy. William Sonoma’s strong direct-to-consumer sales channels have helped insulate it from the struggles seen in most of the industry.
In the bigger picture, however, it’s hard to get past the feeling that much of this has simply been a successful short squeeze. With more than 15% of WSM stock’s float sold short, the fuel was there. Additionally, WSM stock also reportedly jumped recently thanks to people confusing its ticker symbol with that of a meme cryptocurrency.
It’s hard to see how this rally keeps up into 2024, however, especially if the upcoming holiday season fails to match expectations. And in the bigger picture, Williams Sonoma faces long-term competitive challenges from e-commerce firms like Wayfair (NYSE:W) who are likely to cut in profit margins and reduce the firm’s current profitability.
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.
