The Federal Reserve appears set to start cutting interest rates in the coming months. That has set the bulls loose on Wall Street as traders rush to profit from the forthcoming easing in monetary policy.
That’s a logical conclusion given the economic backdrop today. However, some of those traders are getting ahead of themselves. We’re seeing a lot of stocks move up to massive valuations that the underlying businesses simply can’t support. These are three particularly worrisome bubble stocks to sell in February.
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Eli Lilly & Co. (LLY)
Source: shutterstock.com/Michael Vi
Eli Lilly & Co. (NYSE:LLY) is a leading pharmaceutical company that offers treatments for a wide variety of ailments.
The firm has enjoyed incredible performance over the past year thanks to its GLP-1 drugs, including Mounjaro, which have become blockbuster products for helping with weight loss and diabetes management.
These drugs are helping lots of people, and the company’s sales are likely to continue to grow in the coming years. However, the valuation has seemingly gotten way out of hand, with LLY stock up more than 100% over the past year. That has pushed the market cap up to $701 billion and the forward P/E ratio to more than 50.
Meanwhile, Lilly is set to deliver about $41 billion in annual revenues, which is a fine number, but one that doesn’t leave much margin of safety for today’s valuation, especially as revenues are only growing about 20% per year. As pharmaceutical drugs have relatively short commercial lives before patent expiry, it’s simply hard to make the math work for LLY stock based on this starting price.
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Tesla (TSLA)
Source: Rokas Tenys / Shutterstock.com
Elon Musk may be running out of magic. The charismatic Tesla (NASDAQ:TSLA) CEO has long managed to surprise investors with a string of successes and innovations. Tesla has far exceeded the bears’ expectations in terms of how far its sales have grown.
However, Tesla appears to be running out of juice. Weak consumer demand for EVs has led to rising competition and cutthroat pricing across the industry.
Analysts project Tesla to grow earnings per share by only around 2% in 2024. That’s not great news, given that shares are going for nearly 60 times forward earnings. Normally, a company must grow earnings much more quickly to support that sort of P/E ratio.
The company is also facing other concerns amid this slowdown. The Cybertruck has gotten a cold reception in some quarters. Musk is discussing potential layoffs at the company. And there are concerns and controversy around his pay package. All this speaks to an awfully difficult year for Tesla in 2024.
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CrowdStrike (CRWD)
Source: T. Schneider / Shutterstock.com
Perhaps nothing speaks better to the return of the stock market bubble than the software-as-a-service (SaaS) stocks. Many of these companies traded up to incredibly high price-to-sales ratios in 2021 and then saw their share prices collapse in 2022 as financial gravity kicked in.
However, the SaaS stocks are flying once again. Take CrowdStrike (NASDAQ:CRWD) for example. The cybersecurity software company is growing its top line quickly. There’s no disputing that.
But with CRWD stock up nearly 180% over the past 12 months, shares have reached an unsustainable high. The company is not profitable on a GAAP basis and goes for almost 100 times projected forward earnings on a non-GAAP basis. It also is selling for about 25 times its revenues. As we saw a few years ago, bad things tend to happen when people buy software stocks at such lofty prices.
On the date of publication, Ian Bezek did not hold (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.
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Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.
