Defensive stocks are key during a recession, and even during an economic downturn. Trouble is, once the market recovers, these stocks tend to see a major drop. Investors start taking out their returns at high levels, using those returns to then go and invest in growth stocks in a newly revived market.
In fact, some stocks are already showing signs that a drop could be imminent. So, it might be time to consider selling this one stock on the TSX today.
Look for overbought stocks
In general, it’s a good idea to look at overbought stocks to see if there is going to be a trend reversal in the near future. Stocks are overbought when the relative strength index (RSI) surges past about 80.
Of course, there are other fundamentals to look at as well. The same metrics we use to look at whether a stock is valuable, are the same to see if it’s overvalued. In this case, we’d want to look at the price-to-earnings (P/E) ratio, price-to-sales (P/S) ratio, and enterprise value-to-earnings before interest and taxes (EV/EBIT) ratio.
If these are all high, the stock has peaked, as these are good signs of an overbought stock. Add in that insiders might be selling off the stock at peak levels, and you have a good chance that shares are about to drop.
1 stock I’d sell right now
A stock that might be going through this in the near future is Onex (TSX: ONEX). Let me be clear here, Onex stock is an excellent company. It has a diversified revenue stream that includes airlines and transportation across Canada. And it has been doing quite well in the markets.
But this has provided protection for investors that may be past its due. Onex stock is trading up 19% in the last year, and 22% in the last three months alone. Its metrics also point to overbought territory, trading at a forward P/E ratio of 222, an EV/EBIT of 111, and P/S ratio of 14.5. All these are certainly marking it as overvalued.
The stock also holds an RSI at 85.9 as of writing, marking it as overbought. Finally, there hasn’t been any insider activity since May, with shares climbing higher. In fact, chief executives haven’t made any purchases of the stock since 2021. This doesn’t exactly spell out confidence at this point.
Part of the recent movement came as the company made a shift in management. After experiencing a loss in the first quarter compared to a profit the year before, a new chief executive took over the company. So this also could be the reason we’ve seen such a climb in recent months, despite a loss in revenue.
Bottom line
Again, Onex stock is a strong company that continues to make smart investments and acquisitions. Right now, however, if you’re worried about short-term performance in your portfolio, it might be a good time to sell. Yet when prices drop, I would certainly add this stock back to your watchlist for future momentum.
