The market outlook seems positive with the S&P 500 index closing in on a 20% rise year-to-date (YTD). While I expect the momentum to remain positive, I would be cautious with stocks that have witnessed a significant rally. Particularly, when those tempting stocks which saw rallies have become overvalued stocks to sell. The fear of missing out often results in bad investment decisions.
My focus is entirely on fundamentally strong stocks. They experienced big rallies in the first half of the year, but their valuations are now stretched. It makes sense to sell now before they crater and then buy them back at a discounted price. It’s difficult to exactly time the entry and exit. However, considering the forward price-earnings ratio, the probability of a correction is high.
I would reconsider these stocks after at least a 20% correction from current levels. Of course, these companies are financially sound and the business outlook remains positive for the companies these stocks represent.
Let’s discuss these stocks poised to crater.
Marathon Digital (MARA)
Marathon Digital (NASDAQ:MARA) stock has skyrocketed by almost 400% in the first half of the year. I am bullish on Bitcoin (BTC-USD) trending higher in 2024 with a halving on the horizon. However, I believe that MARA stock is likely to correct by 20% to 30% from current levels before a fresh rally. My view is underscored by the fact that valuations are stretched as MARA stock trades at a forward price-earnings ratio of 140.
In terms of positives, Marathon reported an operational and installed hash rate of 17.7EH/s and 21.8EH/s respectively for June. The company expects to achieve its target of 23EH/s operational capacity in the coming months. Further, its Abu Dhabi joint venture is on track for operational capacity of 7EH/s by the end of the year. The impact of robust growth in capacity will be seen once Bitcoin surges higher from current levels. For now, MARA stock is likely to cool-off and consolidate.
Li Auto (LI)
Li Auto (NASDAQ:LI) stock has surged by 81% YTD. The rally has been backed by strong fundamental factors with Li Auto reporting strong deliveries growth. Further, the company’s vehicle margin is superior when compared to its peers in the Chinese electric vehicle (EV) market.
Valuations however look stretched at a forward price-earnings ratio of 50.5. It’s also worth noting that China’s auto sales declined by 2.9% in June. The markets are likely to be cautiously optimistic and some profit booking can be expected.
Coming back to the positives, Li Auto has multiple new models that have supported deliveries growth. In Q4 2023, the company expects to launch Li MEGA. With aggressive retail expansion coupled with launch of new models, the growth outlook remains positive.
It’s also worth noting that Li reported cash and equivalents of $9.46 billion as of Q1 2023. A strong cash buffer will ensure aggressive investment in product development coupled with continued retail expansion. But, for now I would steer clear of this EV maker which has become one of the overvalued stocks to sell.
Nvidia (NASDAQ:NVDA) had touched recent highs of $480. There has already been some correction with the stock currently trading near $450. I believe that NVDA stock is likely to correct further after a big rally of 211% YTD. A forward price-earnings ratio of 56 indicates that valuations are stretched. Without doubt, I would be recommending this stock if it was closer to $350 to $400. For now I see it as one of the overvalued stocks to sell before a correction happens.
The reason to be bullish after a correction is that Nvidia is a leader when it comes to accelerated computing and artificial intelligence. With a big addressable market across industries, the company is poised for stained value creation. As an example, Nvidia reported revenue of $296 million from the automotive segment in Q1 2023. On a year-over-year basis, revenue surged by 114%. With focus on EVs and autonomous driving, this segment is likely to grow bigger in the coming years.
For Q1 2024, the company reported operating cash flow of $2.9 billion. Strong cash flows provide flexibility to make aggressive investments in research and development.
On the date of publication, Faisal Humayun 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.