Stocks, much like all of life, are very dynamic. As companies’ offerings and macro environments change, the attractiveness of their stocks fluctuates. And, of course, valuations play a massive role in the attractiveness of stocks. A stock that was a great buy when its forward price-earnings ratio was 20 will, all things being equal, not be beautiful after its forward P/E ratio has zoomed up to 60 in a relatively short amount of time. This has led to the rise of growth stocks to sell.
Because growth stocks tend to surge that way, such names are particularly susceptible to quickly going from “buys” to “sells.” With all of that in mind, here are three growth names that were once, in my view, great buys but now have become growth stocks to sell.
At the end of 2022 and the beginning of this year, when Tesla (NASDAQ:TSLA) was trading at around $120, I was a big fan of TSLA stock. I viewed worries about Elon Musk’s controversial free-speech policies at Twitter as overdone. I also thought that the Street was overly concerned about the price cuts that the automaker was implementing. The market was undervaluing the company, given its very powerful brand name and rapidly growing top and bottom lines. It’s a classic case of one of those growth stocks to sell.
But I’ve always realized that the electric-vehicle maker has significant weaknesses and threats. Specifically, its EVs reportedly often require major repairs, and it’s facing significantly increased competition in all its major markets. Further, its advanced driver assistance offering has always been widely criticized, and its upcoming Cybertruck is so unorthodox that it may not appeal to many consumers.
Moreover, TSLA stock, trading around $280, has more than doubled from its lows. And now has a vast forward-price-earnings ratio of 82. Given these points, I view TSLA as one of the growth stocks to sell.
Back in 2012, I viewed Starbucks (NASDAQ:SBUX) stock as a great opportunity. The shares had rebounded greatly from their huge decline during the Great Financial Crisis but were still way below their all-time highs. Moreover, the shares were not rising very much due to worries about the company’s competition, doubts about the strength of the U.S. economy, and theories that the firm had saturated its market in the U.S. and Europe.
But I was upbeat about Starbucks’ opportunities in China and the efforts it was making to improve its food offerings and start serving alcohol. (I’m not sure what wound up happening with that particular effort). As with Tesla years later, I thought the market was greatly undervaluing the firm’s strong brand name. As a result, I bought Starbucks stock in 2012 and made some money from it, but I sold it in 2016 when its CEO and founder, Howard Schultz announced in late 2016 that he would resign.
Now, however, I view the work-from-home trend and stepped-up competition from Luckin Coffee (OTC:LKNCY) in China and Dutch Bros (NYSE:BROS) in the U.S. as major threats to the firm. As a result, although I’m hopeful that SBUX’s CEO can turn around the company, I would not advise owning SBUX stock at this point and view it as one of the growth stocks to sell.
However, amid irrational fears about a U.S. recession, the valuation of MCD stock has become far too high. Specifically, the shares now have a trailing price-earnings ratio of 31. I believe the valuation is over the top for a well-established company that will never deliver explosive growth.
Finally, I believe that McDonald’s will encounter greatly steeped up competition from Restaurant Brands International’s (NYSE:QSR) Burger King. QSR has delivered strong growth in recent quarters and last year “hired former Domino’s (NYSE:DPZ) CEO Patrick Doyle as its executive chairman.” Doyle did a great job of turning around Domino’s and could very well do the same for Burger King.
On the date of publication, Larry Ramer’s wife was long LKNCY. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.