A commonly used adage in the financial-world is “sell in May and go away.” The reason is a relative under-performance in the markets between May and October. With that in mind, it might be a good time to look at some stocks to sell in May.
If we look at the S&P 500 index average percentage change each month (1928-2020), the index has delivered negative returns of 0.1% for May. Of course, over the historical period, there have been positive returns in May. However, when returns have been negative, the average downside in the index has been 4.7%.
Considering this historical data, it makes sense to sell overvalued stocks. If the index does trend lower, correction in richly valued stocks can be meaningful.
This column will discuss seven stocks to sell in May. I believe that the stocks discussed are worth keeping in the investment radar. For most of the stocks discussed, the long-term business outlook is robust. However, investors following an active portfolio management strategy can sell these stocks now and buy on declines.
Let’s discuss seven stocks to sell now and buy on dips.
- HubSpot (NYSE:HUBS)
- Cricut (NASDAQ:CRCT)
- Carnival Corporation (NYSE:CCL)
- Zillow Group (NASDAQ:Z)
- Enphase Energy (NASDAQ:ENPH)
- American Airlines (NASDAQ:AAL)
- Snap (NYSE:SNAP)
7 Stocks to Sell for May: HubSpot (HUBS)
HUBS stock is one name that I would love to hold for the long-term. For now though, it’s among the list of names in the top stocks to sell. HUBS stock has surged over 250% in one year and at a forward price-to-earnings-ratio (P/E) of 357, the stock does look overvalued.
The company is a provider of cloud-based customer relationship management platform. With a recurring software-as-a-service revenue model, the company is positioned to accelerate free cash flows in the coming years. In February 2021, the company surpassed 100,000 customers and $1 billion in annual recurring revenue.
Coming back to valuations, for fiscal year (FY) 2020, the company reported revenue of $883 million. Revenue growth was 31% on a year-over-year (YoY) basis. For the year, the company has guided for revenue of $1,165 million. This would imply growth of 31.9%.
While growth is robust, the company will achieve operating level profitability for the first time in the current year. Valuations therefore seem to be ahead of fundamentals. A potential 15% to 20% correction would be a good opportunity to accumulate the stock.
It’s important to note that the company expects operating margin of 20% to 25% over the long-term. This backs my view that FCF will accelerate in the coming years.
The company’s international revenue as a percentage of total revenue has also been increasing. With a global addressable market, there is ample headroom for top-line growth.
CRCT stock might still be flying under the radar after an initial public offering in March 2021. For investors who missed the rally in the likes of Pinterest (NYSE:PINS), CRCT stock is worth considering. However, I believe that the stock might be due for a correction in May before trending higher.
Cricut operates a creative platform that allows users to make handmade goods. Currently, the company has 4.3 million registered users and 1.3 million paid subscribers. With global presence, the company has a total addressable market of 402 million people. This provides ample headroom for growth in subscribers.
For FY2020, Cricut reported revenue growth of 97% on a YoY basis to $959 million. The company has also reported steady growth in average revenue-per-user. For FY2020, EBITDA surged by 242% to $214 million.
An important point to note is that the company’s subscription revenue was $111.3 million in FY2020. This was just 11.6% of the total revenue. If subscription revenue growth is robust, EBITDA margin is likely to improve further in the coming years.
Recently, Cricut had announced that a subscription plan would be needed to full utilize the company’s “crafting machines for precisely cutting paper and other materials.” This move translated into a backlash from crafters. The company’s CEO later apologized and reverted the decision.
I believe that this will impact the company’s subscription revenue in the near-term. The company will announce first quarter results for 2021 in the second week of May. Weakness in subscriber growth can translate into CRCT stock trending lower. For the long-term, I remain bullish.
7 Stocks to Sell for May: Carnival Corporation (CCL)
With hopes of revival in the cruising industry, CCL stock has surged 102% in the last six months. However, it seems that the stock has run ahead of fundamentals. CCL stock has struggled around $30 levels and I believe that a downside is likely before further rally.
In terms of concerns, Carnival CEO Arnold Donald believes that the industry is unlikely to recover to pre-pandemic levels at least through FY2023. For first-quarter 2021, the company reported a monthly average cash burn of $500 million. With slow recovery, cash burn is likely to sustain and this implies further leveraging.
As of February 2021, the company reported nearly $30 billion in debt. I expect higher debt levels and the possibility of further equity dilution in the next few quarters. Given the cash burn, the company currently needs additional debt to service existing debt.
If we look at FY2019, the company reported operating cash flow of $5.5 billion. Clearly, the business has the potential to deliver robust cash flows. Beyond FY2023, cash flows are likely to be strong. However, the focus will be on de-leveraging than dividends or share repurchase.
The company’s booking volume is also accelerating. For Q1 2021, booking volume was 90% higher as compared to Q4 2020. While this is a positive, investors should remember the balance sheet holds the company’s true performance. After a massive rally, CCL may head towards a correction before the long-term recovery begins.
Zillow Group (Z)
Z stock seems like another interesting name that’s worth considering for the long-term portfolio. But not at a forward P/E of 153.9. The stock has corrected from highs of $208. However, I believe further correction is likely.
Zillow offers a new way for people to buy, sell, rent or finance homes. For FY2020, the company reported revenue growth of 22% to $3.3 billion. For the same period, the company’s adjusted EBITDA was $343 million. On a year-on-year basis, the company’s adjusted EBITDA surged by 782%.
However, it’s worth noting that the company’s internet, media and technology (IMT) segment reported adjusted EBITDA of $556 million. The home segment however reported an EBITDA loss of $242 million. The IMT segment therefore seems promising in terms of cash flow upside.
It’s worth noting that in February 2021, the company announced the acquisition of ShowingTime for $500 million. The latter is a, “real estate showing software provider that facilitated more than 50 million in-person home tours in 2020.” This acquisition is likely to help in boosting the IMT segment growth.
Overall, with technology in the forefront, Zillow seems well positioned for growth. For the current year, the company plans to hire more than 2,000 employees. This is an indication of the company’s growth trajectory. However, at current valuations, I would prefer to remain on the side-lines.
7 Stocks to Sell for May: Enphase Energy (ENPH)
The renewable energy sector is likely to see positive tailwinds over the next decade. However, there are several stocks in the sector that seem to have stretched valuations. ENPH stock would be among my stocks to sell at a forward P/E of 96.2.
Further, the company’s earnings growth for the current year is expected at 51.8%. This would imply a price-earnings-to-growth ratio of 1.9. For FY2020, earnings growth is likely to decelerate to 25.5%. Based on FY2022 estimates, the PEG ratio is 3.8. Clearly, the stock seems overvalued. The stock is likely to correct and that will give investors an attractive lower entry point.
In terms of business positives, the company has been expanding its product portfolio. In FY2020, the company’s solar addressable market (SAM) was $4.1 billion. The SAM is expected to increase to $14.1 billion by FY2023.
Furthermore, the global solar inverter market is expected to reach $26.7 billion by FY2026. This provides the company with ample headroom for revenue and cash flow upside. The company has already been reporting positive operating cash flows. As free cash flow swells in the coming years, valuations are likely to adjust on the upside.
Therefore, the bullish trend for ENPH stock is intact. But the biggest bull markets can easily have a 20% intermediate correction. I would wait for that in the case a correction in the renewable energy sector.
American Airlines (AAL)
I believe that the story for AAL stock is similar to that of Carnival Corporation. With hopes of strong recovery in airline booking, the stock has surged 94% in six months.
If I had to choose airline stocks for the pending reopening, stocks like JetBlue Airways (NASDAQ:JBLU) and Alaska Air (NYSE:ALK) would be my choice. For now, AAL stock is among the stocks to sell and I believe that the stock is a good trading bet on any sharp correction.
From a financial perspective, the company ended Q1 2021 with total liquidity of $17.3 billion. By the end of Q2 2021, the liquidity buffer is expected at $19.5 billion. Therefore, even with the cash burn, survival is not a concern.
My concern is as follows – As of March 2021, the company reported total debt of $37.2 billion. As cash burn sustains in the near-term, debt is likely to increase further. With a gradual recovery, the company will be focused on debt servicing and de-leveraging.
With liquidity playing a key role in the market rally, the stock has surged on improving airline demand. However, from a fundamental perspective, AAL stock remains unattractive. If there is a broad market correction in May, the stock is likely to trend lower.
7 Stocks to Sell for May: Snap (SNAP)
SNAP stock has remained resilient at higher levels. However, a correction seems imminent with the stock trading at a forward P/E of 555.6. Recently, Snap also proposed an offering of $1 billion in convertible debt. This could be a potential trigger for some near-term correction.
For Q1 2021, the company reported 66% revenue growth on a YoY basis to $770 million. However, operating loss also widened to $303.6 million. Of course, it’s not a concern considering the fact that the company is still at an early growth stage. For Q2 2021, it seems likely that the company will report positive adjusted EBITDA.
It’s also worth noting that the company reported 280 million daily active users as of Q1 2021. With global presence and with 35 languages currently supported, sustained growth in DAUs can be expected.
In addition, the company reported average revenue per user (ARPU) of $6.29 in FY2018. Last year, the ARPU increased to $10.09. The company is therefore positioned to benefit from higher active users and rising ARPU. With free cash flow approaching break-even, the stock is worth keeping in the radar.
However, after a rally of 255% in the last year, the stock is likely to cool off. For now, SNAP stock would be in my list of stocks to sell. I would be eagerly waiting for a correction to accumulate aggressively at lower levels.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
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.