We spend a lot of time talking about what stocks to buy, but today I want to talk about the stocks we should either sell right away or avoid altogether. It’s actually not that hard to spot these stocks.
They’re trading at very high multiples with low profits, or they don’t have any profits. They trade at absurd valuations based on price to sales or price to book, and the fundamentals are starting to slip and underperform the indexes. And more importantly, you’re seeing clusters of insiders selling enormous amounts of stock.
One insider sale doesn’t mean that much, but when three or more insiders start selling huge amounts of stock, they’re either telling you that there’s something wrong with the company or they think that the company has overshot its real worth.
When you see this kind of action from a bunch of insiders, it’s telling you a story that you need to listen to. It’s a very good indication that a stock is likely to begin to move lower.
Now, here are a couple of stocks that I found that you need to get out of your portfolio immediately. Even if they go higher for a little while, the probability is that these stocks are going to go a lot lower within a relatively short period of time.
Toxic Stock #1
First up is ZoomInfo Technologies Inc. (ZI). Wall Street was in love with this stock, and it’s a fantastic business. They own massive databases of information on corporations, high net worth individuals and potential buyers that marketers use to find likely buyers of a product.
The company has had some success, but the stock is up 43% over the last year, and it’s trading at 237 times current earnings and 90 times what the analysts are expecting they’ll make next year, and it’s trading at 39 times sales, which is ridiculous.
It’s the type of high-tech growth stock that’s extremely sensitive to interest rate movements, and this thing could easily start to move lower if interest rates continue to rise.
A lot of insiders certainly think so as well, as eight insiders sold over 15 million shares over the last month. That’s over $1 billion worth of stock. If they’re selling that much stock, I think we should be selling any ZI stock we own and definitely not buying any until the stock goes a lot lower.
Toxic Stock #2
Next up is Zscaler, Inc. (ZS), which is another pretty good company. It’s a cloud-based cybersecurity business that checks all of the hot, exciting boxes, and there’s certainly a need for its services.
However, it’s ridiculously expensive at current levels: 51 times earnings, 258 times what analysts are expecting they’ll make next year and 51 times sales. There’s a short position in this company that’s been around but is starting to rise a bit lately.
Shorts are very research oriented, and they typically get their numbers correct. So, when short interest is rising, that’s usually a horrible time to buy an overpriced stock. Again, this stock will also be very sensitive to any upward interest rate movements.
Then, six insiders sold about $81 million of stock over the last several months, and those sellers included basically the whole C-suite. If they’re selling, I think we should be sellers, and I definitely do not think we should be buyers. When the stock ultimately rolls over, we definitely do not want to be invested.
Toxic Stock #3
Last up is ChargePoint Holdings, Inc. (CHPT), which I think will be a survivor in the electric vehicle (EV) charging market. But they will not be the overall winner.
And when we take a look at the valuation of the stock, which is up 172% this year, it’s trading at 62 times sales. There has been a massive increase in the short interest to over 70%.
Eight insiders have sold over 300,000 shares worth $7.4 million, and that includes sales made by the chief financial officer, which is always a very bad sign, and at least one of the managing directors.
So, the C-suite is selling stock in what is an increasingly competitive business, the stock is ridiculously overpriced and trading at very high multiples, so it’s time to say goodbye to CHPT if you own it.
If the market rolls over, all three of these toxic stocks are going to lead the way lower. And even if the market goes up or sideways, the odds still say that these stocks will pullback or go down. Insiders think so, and I don’t think we should argue with them.
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