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Exit Strategy: 3 Overvalued Stocks to Sell Before They Deflate

If a portfolio is passively managed, investors tend to buy and forget. This however holds true for high-quality blue-chip and growth stocks. On the other hand, in an actively managed portfolio, there will be ample opportunity for a good entry or exit. The times of extreme euphoria are the best for selling, and buying on panic gives the stock ample headroom to rally. The focus of this column is on overvalued stocks to sell before they correct sharply.

An important point to note is that the overvalued stocks to sell discussed in the column are not speculative ideas. These are quality names that can correct by 20% or 30% in the foreseeable future. This can be used as an opportunity for fresh buying.

In the first week of March, Nvidia (NASDAQ:NVDA) stock touched highs of $927. By April 19, NVDA stock had corrected by 18% to $762. Of course, there was a fresh rally, but the point I want to make is that there will be corrections even in the best ideas. For a short- to medium-term investor, overvalued levels are a good time to sell and wait on the sidelines. Let’s talk about three overvalued stocks to sell that seem poised for a meaningful correction.

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

Datadog (DDOG)

The Datadog (DDOG) logo displayed on a laptop screen.
The Datadog (DDOG) logo displayed on a laptop screen.

Source: Karol Ciesluk / Shutterstock.com

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Datadog (NASDAQ:DDOG) is a provider of observability and security platform for cloud applications. With cybersecurity stocks in focus, DDOG is certainly among the names that’s worth keeping in the radar.

It’s worth noting that even with positive industry sentiments, DDOG stock has remained sideways in the last 12 months. The reason is the valuation with the stock trading at a forward P/E of 70. Therefore, I expect a correction before fresh buying takes the stock higher.

Last month, Datadog reported Q1 2024 numbers and revenue increased by 27% year-over-year (YOY) to $611 million. Further, the cybersecurity company reported operating and free cash flow of $212 million and $187 million, respectively. Another positive is that Datadog ended the quarter with a robust cash buffer of $2.8 billion.

It’s worth noting that the company’s observability market was worth $51 billion in 2023. The market is expected to grow at a CAGR of 11% through 2027. The industry tailwinds exists as the public cloud market swells. However, the valuation need to be more reasonable for fresh buying.

Sarepta Therapeutics (SRPT)

Brown glass pill bottle on its side showing white pills inside, with other pill bottles behind it representing MACK stock.
Brown glass pill bottle on its side showing white pills inside, with other pill bottles behind it representing MACK stock.

Source: shutterstock.com/Champhei

Sarepta Therapeutics (NASDAQ:SRPT) is another overvalued stock that has struggled to trend higher in the last 12 months. The commercial-stage biopharmaceutical company trades at a forward P/E of 36.4.

This looks expensive when compared to some blue-chip biopharma companies. As an example, AstraZeneca (NASDAQ:AZN) stock trades at a forward P/E 19.8. Similarly, Merck (NYSE:MRK) trades at a forward P/E of 15. I therefore expect a meaningful correction for SRPT stock before fresh exposure is considered.

Specific to the business, Sarepta has an attractive genetic medicine pipeline. At the same time, the current products are delivering healthy growth. For Q1 2024, Sarepta reported 55% YOY revenue growth to $359.5 million. Further, the biopharma company reported operating income of $34 million as compared to operating loss in the prior year. Therefore, financial metrics have improved significantly. I would look at corrections as a good opportunity to accumulate the stock for the next few years.

Casella Waste Systems (CWST)

person depositing a plastic water bottle in a yellow plastic recycling bin. The bin is in a line-up of several other blue and green bins.
person depositing a plastic water bottle in a yellow plastic recycling bin. The bin is in a line-up of several other blue and green bins.

Source: shutterstock.com/PhotoByToR

Casella Waste Systems (NASDAQ:CWST) operates as a solid waste services company in the United States. The services include waste collection, disposal, recycling and more. The business is attractive and is immune to recession. However, there is no doubt that CWST stock is overvalued. Currently, the stock trades at a forward P/E of 125.5 and I would not be surprised with a 20% correction.

For Q1 2024, Casella reported 29.9% growth in revenue on a YOY basis to $341 million. For the same period, adjusted EBITDA was $71 million with margin expansion of 150 basis points. Therefore, key financial metrics have been positive.

It’s also worth noting that Casella has pursued acquisitions in the past to accelerate growth. With a strong balance sheet and free cash flow visibility, it’s likely that further acquisitions will be pursued. This is a possible catalyst for revenue growth acceleration.

On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.

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