Is it Time to Sell These 5 Overvalued Stocks?

Key Points

• Wingstop, Celsius, Southwest Airlines, Vistra and Dell have all shown fundamental and technical strength, but pullbacks wouldn't be surprising. 
• When facing an overvalued stock, long-term investors may choose to hold if they trust the underlying fundamentals.
• However, short-term traders might sell overvalued stocks and wait for a better entry point.
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As Nvidia Corp. NASDAQ: NVDA continues to lead the S&P 500 higher, even as other big techs such as Microsoft Corp. NASDAQ: MSFT and Apple Inc. NASDAQ: AAPL pull back sharply, some investors are wondering whether Nvidia stock may be overvalued.

While Nvidia is the most prominent stock in this market cycle, other recent winners are also getting scrutiny as they’ve raced higher, with some analysts believing they’re due for a pullback soon.

Wingstop Inc. NASDAQ: WING, Celsius Holdings Inc. NASDAQ: CELH, Southwest Airlines Co. NYSE: LUV, Vistra Corp. NYSE: VST and Dell Technologies Inc. NYSE: DELL have all staged strong rallies, often a signal that big investors are ready to take some profits.

How to Handle an Overvalued Stock

Those holding a stock that appears to be overvalued have a few ways to proceed, depending on their time horizon. Long-term investors might opt to hold onto the stock if they believe in its underlying fundamentals, while short-term traders might consider selling and waiting for a more favorable entry point to get back in.

The latter approach takes opportunity cost into account; rather than sitting through a pullback, proceeds from a sale can be deployed elsewhere. In the current market, even a high-yield savings account can be a place to park cash and get a solid return. 

Will Wingstop’s Wings Soon be Clipped?  

Wingstop shares are up 50% in the past three months, with the stock working on its seventh month in a row of upside price action.

The mid-cap is a leader among restaurant stocks, and its price-to-earnings ratio of 147 reflects that fast pace of growth. Wingstop earnings have been increasing at double-digit rates since 2020, and analysts expect that trend to continue this year and next.

However, the Wingstop chart offers a clue about possible ways handle this stock. 

When a stock is extended well above moving averages, as Wingstop is, investors might consider selling or reducing exposure to mitigate potential losses. 

Can Celsius Holdings Maintain Energy Levels?

The Celsius Holdings chart shows the energy drink maker advancing 66.79% in the past three months. Celsius stock has returned 28.45% in the past week after the company’s better-than-expected earnings report on February 29. 

MarketBeat’s Celsius analyst forecasts show a consensus view of “moderate buy,” with a price target of $76.13. That’s a downside of 13.21%, an indication that the stock is ready for a pullback after such a fast upward trajectory.

That’s perfectly normal, as institutional investors frequently take profits after a big run-up, even if they simply pare back positions to rebalance their portfolios. 

Is Southwest Airlines Reaching Cruising Altitude?

The Southwest Airlines chart shows the stock breaking out of a steep cup-with-handle base with a 45% peak-to-trough correction. 

With that correction, the stock even undercut its May 2020 pandemic-era low. 

As it worked on the right side of its most recent base, Southwest stock rallied back 27.97% in the past three months. It’s not unusual, after a rally of that size, for a stock to see a pullback. 

In a March 2 note, CFRA analyst Jonathan Handshoe dropped his rating to “hold” from “buy,” saying, “While domestic travel has seen significant improvement since the Covid-19 pandemic, we think LUV could face significant headwinds as international travel has outpaced domestic travel in 2023, and we believe that will be the case heading into 2024.”

Vistra Ready to Power Down?

Utilities stocks aren’t typically among the market’s biggest leaders, but that’s exactly where Vistra sits right now, outperforming the broad market by a wide margin. 

The Vistra chart shows the stock advancing 58.16% in the past three months. Vistra stock is currently trading at lofty levels, 13.2% above its short term 10-day moving average

Vistra’s dividend yield is 1.4%, relatively low by utility-sector standards, but that’s partly due to its fast share-price uptrend. The company has also returned capital to shareholders via share buybacks, which contribute to price increases. 

Vistra analyst forecasts show a consensus rating of “buy,” but notice the price target of $46, a downside of 24.05%. Despite this stock having a lot going for it, that rapid price appreciation can’t last forever. 

Can Dell Keep Soaring on AI-Driven Earnings 

Dell stock has pulled back since a 32% gap higher on March 1, following upbeat fourth-quarter results. 

Earnings came in at $2.46 a share, a 12% year-over-year increase. Revenue of $25 billion also Marked an increase of 12%.

In a March 1 note, Morningstar analyst William Kerwin raised his fair value estimate on Dell to $55 from $46. However, that still implies a forecast of a significant pullback, as Dell stock is currently trading at around $120.

Kerwin wrote, “Dell holds top market shares across its businesses, but these are predominantly commoditized, cyclical, and price-competitive markets that, in our view, don’t endow a leader like Dell with an economic moat. We forecast Dell to see no more than modest top-line growth into the medium- and long-term, and see little opportunity for material and durable margin expansion.”

MarketBeat’s Dell analyst forecasts show a consensus price target of $102.88, a downside of 14.08%.