The Motley Fool

Warning: 1 Expensive Stock I’d Look to Take Profits On

As an investor, it’s your job to be ready for whatever the unpredictable market throws your way.

If it pitches a bargain, you should swing, regardless of what that market strategist on TV predicts will happen over the short term. And if you’ve made a considerable amount from a contrarian position, you should take some profits off the table if you no longer think the fundamentals are worth the higher multiple.

While it seems as though the markets can only go higher given that the Fed has its back, I’d urge investors to be wary of some of the frothier names on the TSX Index amid the recent rush back into stocks.

Consider shares of Shopify (TSX:SHOP)(NYSE:SHOP), which more than doubled off March lows. It is looking too hot to handle for a majority of value-conscious growth investors.

Whenever you’re given a chance to play with the house’s money, you should take it!

I urged investors to back up the truck on Shopify stock when shares imploded during the coronavirus crash. I noted then that the company was likely to view lockdowns as a tailwind, as tech-unsavvy physical retailers rushed to gain a digital presence to salvage lost sales.

The stock broke-out to new all-time highs, blasting past the $1,000 mark. The valuation quickly got out of hand, as its customer additions skyrocketed. The stock soon found itself sporting a price-to-sales multiple above 50 (that’s sales, not earnings!), making it one of the most expensive stocks an investor will ever come across.

There are a lot of things to love about the company, including its major tailwinds, the brilliant management team led by visionary founder Tobias Lütke, and its demonstrated resilience in times of economic hardship. But, it’s only prudent to take some profit off the table after shares doubled up in just under two months.

Shopify may be a wonderful business, but at these heights, it’s hardly a wonderful stock. After all, it is likely that you’re paying for many years’ worth of growth right off the bat!

Foolish takeaway on Shopify stock after its incredible pop

Shopify stock may have defied the laws of gravity for extended periods. But there have also been many instances when the stock plunged violently, leaving those that got in too late holding the bag.

With shares currently trading at well north of 40 times sales, Shopify stock looks way overdue for another big plunge (possibly back to the 20-30 times sales range). As such, I’d encourage investors to take a bit of profit off the table so they can buy back at lower multiples should Shopify be on the verge of becoming a victim of its own success.

If you're looking for opportunities in this uncertain market, I'd encourage you to consider the following

This Tiny TSX Stock Could Be the Next Shopify

One little-known Canadian IPO has doubled in value in a matter of months, and renowned Canadian stock picker Iain Butler sees a potential millionaire-maker in waiting...
Because he thinks this fast-growing company looks a lot like Shopify, a stock Iain officially recommended 3 years ago - before it skyrocketed by 1,211%!
Iain and his team just published a detailed report on this tiny TSX stock. Find out how you can access the NEXT Shopify today!

Click here to discover how!

Fool contributor Joey Frenette has no position in any of the stocks mentioned. Tom Gardner owns shares of Shopify. The Motley Fool owns shares of and recommends Shopify and Shopify.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.