This article originally appeared on TradersReserve.
The market continues to make new highs, and plenty of stocks are too — whether they should be or not. Many companies have posted strong earnings and beat Wall Street expectations, and have justifiably seen their share prices surge. Others, however, have run up a little too far in front of their earnings potential, and represent�stocks to sell.
How to Tell a Stock is OvervaluedOne way to measure whether a stock is overvalued is to look at the price-to-earnings-to-growth ratio, or PEG ratio. A stock that is considered fairly valued will have a PEG ratio of 1, which simply means the price-to-earnings (P/E) ratio equals the estimated earnings growth. Traditionally, a PEG ratio over 1 means the stock is overbought.
The names on this list of stocks to sell are overvalued based on their high PEG ratios. In addition, they have all made big moves up in the past year, and a pullback is likely. So if you own any of them, you should think about taking your profits off the table.
Stock to Sell #1 – Amazon.comOnline retailer Amazon.com (NASDAQ: AMZN) has posted a most-impressive gain of over 22% in just the past three months, and over the past 12 months, the stock is up more than 61%. The stock has a PEG ratio of 3.04, so it can be said to be overvalued here. But the real headwinds for Amazon could come from Apple (NASDAQ: AAPL) and Sony (NYSE: SNE). Both companies have e-readers with greater functionality than Amazon’s Kindle, and if these devices start to take market share from the Kindle, it could be the catalyst investors need to turn the page on AMZN.
Stock to Sell #2 – Green Mountain Coffee RoastersThis coffee stock has been a darling of investors for the past year. Green Mountain Coffee Roasters (NASDAQ: GMCR) shares spiked over 400% in the past two years, giving shareholders a caffeine high all the way to the bank. But recently, many analysts cut their rating on Green Mountain shares to “underperform” from “neutral,” citing the coffee seller’s high valuation. With a PEG ratio of 2.67, now may be the time for investors to quit drinking Green Mountain shares.
Stock to Sell #3 – Harley-DavidsonIconic American motorcycle brand Harley-Davidson (NYSE: HOG) has twisted the throttle on its stock, climbing nearly 34% during the past three months. Over the past year, the company’s stock has rumbled more than 75% higher. Harley-Davidson just posted earnings that actually beat the consensus forecast; however, it did so on a loss of $42.1 million, and a decline in retail sales of motorcycles. With slowing sales, the company had to rely on cost cutting to make its quarter. However, this cost-cutting can’t last forever, and with a PEG ratio of 2.77, this is one overvalued hog whose ride has likely come to an end.
Stock to Sell #4 – Salesforce.comSalesforce.com (NYSE: CRM) is a customer relations management software maker that helps businesses increase their efficiency. The company’s earnings have been solid over the past several years, and investors have rewarded the stock with a 117% gain in the past 12 months. And while we think Salesforce.com will continue earning money, at a PEG ratio of 9.61, it definitely falls into the overvalued column. If you have profits in this stock, now just might be the time to increase your portfolio’s efficiency by selling your CRM shares.
Stock to Sell #5 – YahooOnline search engine firm Yahoo (NASDAQ: YHOO) just reported earnings that beat consensus forecasts. Revenue in the first quarter totaled $1.53 billion, certainly a big number, but that represented an decrease of 11.9% over prior year. The lower-than-expected top-line number prompted traders to sell the stock, and in this case, following the smart money might be the prudent thing to do. Yahoo has a PEG ratio of 1.98, and its shares have gained nearly 30% in the past six months. That means that if you’re riding this overvalued roller coaster, it could be a good time to get off.
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