The stock market has been doing well despite the tight market environment. Three stocks jumped significantly in the last two months, and it is time to book profits. While these stocks are good investments, their inflated stock prices could fall as their fundamentals don’t support this price in a high-interest environment.
Three stocks to sell and take your profits
You don’t have to wait for the stock to peak to book profits. Instead of being greedy, sell these seasonal stocks before they fall.
Airline stocks have been trading high as passenger traffic increases. Air Canada (TSX:AC) stock surged a whopping 38% between May and July due to seasonal demand and hopes of returning to profits. At $24, it is a good price point to exit because even if the airline returns to profit, its $6.5 billion net debt in a high interest rate environment will maintain pressure on its margins.
The airlines’ third-quarter earnings on August 11 could push the stock to $26, but this is an expectation. If the earnings show a weak outlook, the stock could slide faster. At present, Air Canada stock is trading at 2018 levels. For the stock price to surge, the airline has to reduce its debt.
|Air Canada’s fundamentals||2018||2019||2022|
|Revenue||$18 billion||$19.1 billion||$16.6 billion|
|Net Income||$37 million||$1.5 billion||($1.7 billion)|
|Net Debt||$5.2 billion||$2.8 billion||$7.5 billion|
|Free Cash Flow||$1.3 billion||$2.1 billion||$796 million|
In 2019, AC stock surged 90% as the airline almost halved its net debt, which helped it boost its net income to $1.5 billion ($37 million in 2018). If you bought the stock below $20, now is a good time to sell at $24 and book a 20% profit.
Many economists fear a recession is around the corner because of the inverted yield curve (the short-term interest rate is higher than the long-term interest rate). It is difficult to state when the recession will strike or whether it will strike or not. But if it does strike, Air Canada stock could plunge 30–40%. And then another three- to four-year wait period will begin before the stock returns to current levels. Sell while you are still in the money.
Another inflated stock is Shopify (TSX:SHOP). The stock rallied 30% in May after reporting better-than-expected revenue growth of 25%. The company expects to maintain this revenue growth in the second quarter, but that does not justify its $84.60 stock price (14 times its sales per share).
Moreover, rising interest rates might keep consumer spending low during the holiday season. And if a recession materializes, Shopify stock could fall 30–40% to $60 as it did in the March banking crisis. The stock is trading closer to its 52-week high. The $84 price is higher than its pre-pandemic highs, limiting its upside in a weak market.
Another growth stock to book profits is Hive Blockchain Technologies (TSX: HIVE). The stock is still volatile and influenced by crypto news. Hence, I suggest investing in this stock for the short-term; buying at or below $4 and selling at $8. The stock reached an $8 price point in July when Bitcoin gained momentum as Fidelity showed interest in launching a Bitcoin ETF. This $8 price is not sustainable for Hive unless we are in a crypto boom, which is unlikely with the recession looming.
Hive can sustain an economic downturn with its Bitcoin inventory and graphic processing unit (GPU)-powered data centre. The stock has dipped to $6.60, but all is not lost. You can still book a 60–65% profit if you purchased the stock at or below $4 before it falls further.
A stock to buy from these profits
You can rebalance your portfolio and reinvest the profits from the above growth stocks in steady dividend stocks like BCE. BCE stock is trading near its 52-week low, which means you can lock in a higher dividend yield of 6.78%. And as the stock is oversold, there is a limited downside and more upside.