The markets are starting to cool off in September, and now is a good time for investors to start re-evaluating their portfolios. Hanging on to high-priced investments could be dangerous if there’s another crash, and that’s looking more and more likely by the day. The economy is still fragile, and a second wave of COVID-19 could be what sends the markets back into a tailspin. These are three stocks you don’t want to be caught holding when the markets collapse again.
Shopify (TSX:SHOP)(NYSE:SHOP) hit a high of $1,502 this year, but in recent weeks it’s been falling. On Monday, it closed at $1,231.22. Year to date, the stock is still up around 130% and has had a tremendous year, again. The coronavirus pandemic pushed people online, which led to Shopify posting a fantastic second quarter, where its sales grew by 97% year over year. But the problem is, that kind of growth just isn’t sustainable. Not while the economy is in a recession and when many people are out of work.
It’s tempting to get caught up in the hype surrounding Shopify’s recent results, but doing so could put investors into a dangerous position. Currently, Shopify’s stock is trading at a forward price-to-earnings multiple of 400 and more than 50 times its sales. The stock has been trading around the $1,000 mark since May, but investors shouldn’t forget that in March, the tech giant’s price fell below $500. If there’s another market crash, Shopify investors could get burned holding the stock, and now may be a good time to consider unloading it.
Lightspeed POS (TSX:LSPD) is another hot tech stock that could fall hard in the event of a market crash. The company’s growth rate has stalled of late, as sales of US$36 million in its most recent quarter, Q1, were flat from Q4. And the danger is that could be a trend that continues, especially given that the company’s business caters to retailers and restaurants — two particularly fragile sectors during the pandemic.
A second wave of COVID-19 could lead to more shutdowns, and that’ll make it even more difficult for Lightspeed to continue growing its business. The company remains unprofitable and with a price-to-sales ratio of more than 20, investors are also paying a premium for this tech stock. Although it may not be as pricey as Shopify, this is another investment that could be too dangerous to hold if the markets go south. Year to date, Lightspeed’s stock is up 13%.
Facedrive (TSXV:FD) is probably the worst stock to be holding on to if there’s a market crash. Not only is it not profitable, but investors are paying around 1,500 times the company’s sales. Its valuation is ludicrous, and it’s due for a correction, even if there isn’t a crash. With minimal revenue to justify its $1.4 billion valuation, Facedrive investors are taking on a big risk by keeping this stock in their portfolios. The ride-hailing stock is up 530% this year, making even Shopify’s returns look mediocre.
But the problem is that there isn’t much in the way of results to back up Facedrive’s business at this stage. Sure, the company has a lot of potential, and it recently acquired Foodora’s assets, but that’s just not enough of a reason to value this stock this highly, as the growth prospects may never materialize, especially with the coronavirus pandemic crippling many businesses this year. Facedrive stock is down 27% in the past month, but there’s still a lot more room for this pricey stock to fall.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. 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, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor David Jagielski 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. The Motley Fool owns shares of Lightspeed POS Inc.