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3 Bubbles That Could Pop in the Next Market Crash

By David Jagielski – Sep 20, 2020 at 6:08AM

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These stocks are grossly overpriced.

Last week, 860,000 Americans filed for unemployment for the first time. There are more than 12 million people out of work, and according to data from Yelp, approximately 60% of businesses that are closing their doors during the coronavirus pandemic will be staying shut for good. It doesn't paint a rosy picture for the economy, regardless of how well the stock market's doing. And when things don't make sense in the markets, they often correct. 

That's why it's understandable to be concerned about sky-high stock prices right now, as many of them could fall hard if there's another market crash. Intuitive Surgical (ISRG -2.38%), Beyond Meat (BYND -8.70%), and Salesforce (CRM -1.10%) are three of the more expensive stocks on the markets right now. Here's why you may want to consider steering clear of them.

1. Intuitive Surgical

Now that the economy's no longer in shutdown mode and hospitals are taking on elective procedures, companies like Intuitive Surgical -- which makes the da Vinci series of surgical systems -- are doing better than they were just a few months ago.

On July 21, the California-based business released its second-quarter earnings for the period ending June 30, reporting sales of $852.1 million. That was a 22.5% decline from the same period last year, when its sales came in at $1.1 billion. With fewer procedures during the period, there was less demand for the company's surgical systems. Intuitive shipped 178 da Vinci systems in Q2 compared with 273 in the prior-year period, for a decline of 35%. The company was, however, able to remain profitable, recording a net income of $68 million in Q2, down 78% from last year's tally of $313.5 million.

Man about to pop bubble with pin

Image source: Getty Images.

Intuitive is a great long-term investment, as its innovative surgical systems will help enhance the healthcare industry and add efficiencies along the way. But unfortunately, with the stock up 16% this year, its valuation is simply too steep to make it a good buy right now. It's trading at a forward price-to-earnings (P/E) ratio of over 50 -- a high premium to be paying for any stock. A year ago, that multiple was below 40.

The risk is that this highly priced healthcare stock could come crashing down if the markets turn south. Not only is it an expensive buy, but if there's a crash in the markets, that probably means there's been a second wave of COVID-19 that sends investors into a panic. And if that happens, there's the risk of more shutdowns, and the chance that hospitals will once again defer elective procedures.

If you want to buy Intuitive for the long term, you may be better off waiting for a dip in its share price, which appears likely sometime over the next 12 months.

2. Beyond Meat

Plant-based food producer Beyond Meat is another stock that may be risky right now. For one thing, it's incredibly volatile. While it's currently trading at about $150, when the markets crashed in March, Beyond Meat's share price plummeted below $50 at one point. 

Unlike Intuitive, Beyond Meat's still generating strong sales numbers, even amid shutdowns. On Aug. 4, the company released its second-quarter results for the period ended June 27, and net revenue of $113.3 million rose 69% from the prior-year period. Its sales in the U.S. more than doubled to $96.5 million, more than offsetting declines in its international segment. However, that didn't help much in the way of profitability, as Beyond Meat still posted a loss of $10.2 million, higher than the $9.4 million loss it incurred a year ago.

Since profits remain elusive for Beyond Meat, a look at its price-to-sales (P/S) multiple will be more appropriate in gauging its valuation. And here, the stock's trading at 24 times its sales -- it closed 2019 at an already high P/S of around 20.

Beef patties are still more than $1 per pound cheaper than Beyond Meat's value packs, and the deeper the economy gets into a recession, the more consumers' wallets may force them into looking at more affordable options than Beyond Meat's products. That, combined with the stock's high valuation and significant volatility this year, are just a few of the reasons why you may want to rethink putting this stock into your portfolio. A crash in the markets could send its share price reeling, again.

3. Salesforce

The cloud is a popular place to be during the pandemic, and that's where many businesses are headed. It's a key reason why customer relationship company Salesforce is still doing well, generating sales growth of 29% in the second quarter. In results released Aug. 25 for the period ended July 31, sales of $5.2 billion were up from $4 billion in the prior-year period. The company's pre-tax profit of $839 million was also more than five times the $164 million it recorded last year.

Overall, it was a record-breaking performance for Salesforce, as it was the first time the company hit $5 billion in revenue in a single quarter. And management expects those numbers to continue to climb, projecting revenue for the third quarter to come in between $5.24 billion and $5.25 billion.

The nagging risk here is that, again, in the midst of a recession, the growth may start to dry up as businesses look for expenses to cut. Salesforce's marketing and sales products and services, which may not be critical when the economy isn't growing, could be an easy target. And even without a slowdown, the stock's still incredibly expensive; its forward P/E of 80 is significantly higher than the already high multiple of 50 it was trading at just a few months ago.

With the stock already up around 50% this year, it may be worth cashing out those gains if Salesforce is still in your portfolio.

None of these stocks are worth buying right now

Year to date, all three of these stocks have outperformed the S&P 500:

^SPX Chart

^SPX data by YCharts

When the markets start to crash, the natural instinct for many investors is to pull money out of high-priced stocks and into safer, more value-oriented investments. If you're holding one of these expensive stocks in your portfolio, now may be a good time to start planning an exit strategy, as a crash in the markets could send them over a cliff.

David Jagielski has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Beyond Meat, Inc., Intuitive Surgical, and The Motley Fool recommends Yelp and recommends the following options: long January 2022 $580 calls on Intuitive Surgical and short January 2022 $600 calls on Intuitive Surgical. The Motley Fool has a disclosure policy.

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