today is May 23, 2022

Now may be the time to sell these stocks before their bubbles pop.

Key Points

  • Valuations have gotten extreme for these three stocks thanks to rising share prices.
  • Although these companies have been delivering good results of late, that may not be enough to keep their shares from falling.
  • None of these companies has been able to consistently turn a profit.

Many investors are worried about a market crash as stock values continue to hover at record levels. But even if a full-blown crash doesn't happen and a more modest correction takes place instead, that could still lead to significant losses for investors with expensive stocks in their portfolios. By paying attention to fundamentals and ensuring you aren't holding any stocks that are wildly overvalued, you can reduce your risk.

Three stocks I would consider selling today are Shockwave Medical (NASDAQ:SWAV)Peloton  (NASDAQ:PTON), and Snap  (NYSE:SNAP). While they've all done well over the past 12 months and have outperformed the SP 500, there could be tougher times ahead for these companies.

People talking at a table.

Image source: Getty Images.

1. Shockwave Medical

Healthcare company Shockwave Medical uses shockwaves to break up calcium deposits. The company's catheters can help in situations where blood flow is restricted. And earlier this year, the U.S. Food and Drug Administration (FDA) gave the company's shockwave pressure wave therapy the green light to treat advanced heart disease. It's an exciting opportunity for the business, because experts say calcification can present a serious obstacle for physicians when doing angioplasty procedures -- one that current tools may not be able to overcome.

But despite the potential growth opportunities ahead for the business, the stock may just be too expensive of a buy right now. For the first three months of 2021, sales of $31.9 million weren't even enough to cover the company's operating expenses of $41.5 million. While the year-over-year revenue growth of 110% was impressive, it's still hard to justify the $6.4 billion valuation, which puts Shockwave Medical's stock at a price-to-sales (P/S) multiple of more than 73. By comparison, the average stock in the ARK Innovation ETF trades at just 11 times its revenue, and those are holdings that possess high growth potential. 

Unless you are willing to hold Shockwave Medical for the very long term, a safer bet may be to leave it on a watchlist for now and wait for it to fall in price. In the meantime, there are plenty of other value buys that may be safer to hold right now.

2. Peloton

Peloton was a popular stay-at-home stock for investors to hold during the pandemic, as consumers weren't able to visit the gym and instead opted for the company's bikes and treadmills. But bad press (involving a recall after a treadmill accident led to the death of a child) combined with investors' general move toward stocks that will do well upon reopenings to leave Peloton's stock in a tailspin; year to date, its shares are down more than 22% while the SP 500 has risen by 17%. 

However, even with the decline in share price, the stock is still incredibly expensive given the business' underwhelming numbers. While Peloton is profitable, its profit margin over the trailing 12 months is just less than 6%, and two of the past five quarters have been in the red. Its price-to-earnings multiple is more than 140, which is obscene by any comparison. And with a P/S multiple of 10, it's not terribly cheap on that metric, either. 

My concern is that the company's growth rate could start to decline as people go back to gyms, and that could make staying out of the red a challenge in future quarters. Workers are also quitting their jobs at record levels, and that could put those consumers' finances in disarray, at least in the short term. The loss of a job (voluntary or not) could make buying a $1,000-plus bike just not that much of a priority anymore -- and it may not look nearly as affordable.

Unless you have an incredibly rosy outlook for Peloton (which I don't), there's simply not much of a reason to buy the stock at its hefty valuation.

3. Snap

Snap is coming off a great second quarter in which it continued to do well even amid reopenings. The social media company behind Snapchat reported that its daily active users topped 293 million, up 23% year over year. Its revenue for the period ending June 30 totaled $982 million, more than double the $454 million that Snap reported a year ago, thanks largely to enhancements to its augmented reality platform. Its net loss of $152 million was also cut in half. Snap projects that its revenue will rise next quarter as well, but at a more modest rate between 58% and 60%.

The company is doing many things well, and solid user growth in this period -- when people have been less glued to their phones than during lockdowns -- is an impressive feat. But with Snap's stock rising more than 230% over the past year (the SP 500 is up just 35%), its valuation has gotten out of control. Today, Snap trades at a P/S multiple of 33, well above the average stock in the Technology Select Sector SPDR Fund, where the P/S average is less than 7.

The stock certainly has potential if it can keep adding users and driving this level of revenue growth, but even management is forecasting some softness ahead in its top line. It wasn't until the pandemic that shares of Snap really took off, and there's no doubt the company benefited from stay-at-home trends. I'm just not optimistic that it can keep up its impressive numbers heading into the fall, when students go back to school and life potentially goes back to how it was before the pandemic.

Should you invest $1,000 in ShockWave Medical right now?

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

David Jagielski has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Peloton Interactive and ShockWave Medical. The Motley Fool has a disclosure policy .