Proceed With Caution When Considering These 5 Ultra-Popular Stocks

It’s natural to want to jump on the bandwagon and buy the popular stocks like everyone else, but if you don’t proceed with caution, you may risk losing it all.

Adam Othman

Adam is a value investor who is always on the hunt for fantastic undervalued companies that he can share with Motley Fool readers. He follows Warren Buffett and Charlie Munger's investment advice and has completed the Canadian Securities Course. When he's not investing, Adam can usually be found traveling or skiing.

Published January 11, 2024 9:30 am EST

At any given time, the stocks on the market fall somewhere on the spectrum of ultra-popular and entirely under the radar. It’s natural to lean toward the popular end of the spectrum because it feels safe to do what everyone else does, but it’s not always a good idea. Many popular stocks may be riding on temporary market sentiment instead of long-term solid fundamentals, so a bit of caution is necessary.

Five stocks are currently quite popular among investors that you should approach with caution. They shouldn’t be dismissed outright, but you should thoroughly evaluate them before making a decision.

Caution, careful — Image source: Getty Images

A crypto stock

It’s almost a consensus that you should always be careful when buying crypto stocks. Investing in crypto stocks is considered risky because of the volatile nature of the underlying assets — i.e., cryptocurrencies. Bitfarms’s (TSX:BITF) recent performance is an excellent example of the growth potential of crypto stocks.

The stock has grown over 170% in the last one and a half months. The growth was spurred by the growth of Bitcoin, which has been going up since Oct. 2023, and the momentum hasn’t waned yet.

Despite the growth of the underlying asset, it’s essential to be cautious of Bitfarms stock because the trend can reverse just as sharply.

A bank stock

There is rarely a reason to be cautious when buying Canadian bank stocks for their dividends. Still, if you plan on buying Canadian Imperial Bank of Commerce (TSX: CM) for its recent hike, there is reason to be cautious. It’s a bit overvalued compared to other bank stocks, and its long-term growth history is not as impressive as others.

But if you have set your eyes on the dividends, it’s a healthy enough pick. The yield is quite good, despite the uptick in the valuation, and the payout ratio is relatively healthy compared to some of its peers in the banking sector.

A utility company

Algonquin Power & Utilities (TSX: AQN) was among the top utility and renewable stocks in Canada for both its dividends and capital appreciation potential up until a while ago. However, owing to some financial challenges, the company had to divest a sizable segment of its business and slash its dividends, which caused the stock to plummet. It has already lost over half of its value from its mid-2023 valuation.

Be cautious about this stock because its debt management practices got it in trouble the first time. While the company is doing many things right, and the financials are in relatively good shape, if a negative macro factor impacts the industry, Algonquin may be more vulnerable than others.

A gold stock

Gold stocks like Barrick Gold (TSX: ABX) usually tend to rise in popularity whenever there is uncertainty in the market or the economy is struggling, but that’s not always the case. The stock has been going up for the last three months alongside a healthy market, but the growth hasn’t been consistent.

But the chances of this trend continuing for long are not very good. If the TSX continues to perform well and the economy keeps on improving, investors may start diverting money from gold and gold stocks to index funds and other, more rewarding stocks than hedges like gold. The stock is also dangerously overvalued and is offering a modest yield at best.

An energy stock

Many Canadian energy stocks are still riding the powerful bullish momentum that started near the end of 2020 and propelled the sector upward at a robust rate. Canadian Natural Resources (TSX: CNQ) is one such stock, but that’s not its only appeal. It’s one of the largest independent oil and gas companies in the country and has been one of the most stable energy stocks in Canada for decades.

However, despite its underlying strengths, it may be a good idea to be cautious when buying this energy stock because the bullish momentum may wane soon. If a correction is coming, there might be a high chance of losing money with this stock (at least in the short term).