In just a matter of days, we'll wrap up what's been a banner year for Wall Street. The iconic Dow Jones Industrial Average recently reached a new all-time high. Meanwhile, the broad-based S&P 500 and growth stock-driven Nasdaq Composite are higher by 24% and 43% year to date, respectively, as of the closing bell on Dec. 22.
Although bull markets are collectively viewed with wide-eyed optimism by investors, it's important to recognize that not every stock will be taken along for the ride. As we prepare to push forward into a new year, five widely owned and exceptionally popular stocks stand out for all the wrong reasons. Despite their phenomenally strong performances in 2023, they're all stocks I'd sell right now.
Image source: Getty Images.
Nvidia
The first stock I'd suggest cutting ties with is semiconductor giant Nvidia (NVDA 6.18%). Though the company has been the top-performing megacap stock in 2023, its road to a repeat in 2024 is filled with a number of headwinds.
Nvidia's gains this year were driven by the artificial intelligence (AI) revolution. The company's A100 and H100 graphics processing units (GPUs) are currently staples in high-compute data centers. Since production capacity for GPUs is limited, Nvidia has been able to command exceptional pricing power. Higher pricing on scarce A100 and H100 chips have driven almost the entirety of the company's data center segment sales growth.
However, things will be changing in the new year. Taiwan Semiconductor Manufacturing has increased its chip on wafer on substrate capacity, which will allow Nvidia to sell more of its AI-driven GPUs. Additionally, Advanced Micro Devices will be increasing the rollout of its MI300X AI-GPU, which is a direct competitor to Nvidia. Less scarcity for GPUs in AI-accelerated data centers should quickly deflate Nvidia's pricing power (and its gross margin).
U.S. regulators are also placing a ceiling on Nvidia's growth potential. Regulators have, on two occasions, placed limitations on high-powered GPU exports to China. These limitations could result in billions of dollars of lost revenue per quarter.
Furthermore, every next-big-thing investment trend over the past three decades has gone through an initial bubble phase, and I highly doubt AI is going to be the exception. As businesses take a step back and analyze their needs, it wouldn't be surprising if demand for Nvidia's GPUs failed to meet lofty expectations.
Costco Wholesale
A second ultra-popular stock I believe is worth selling right now is warehouse club Costco Wholesale (COST 1.01%).
Considering that Costco stock has produced only three years of negative total returns over the past 22 years, the thought of selling shares probably sounds preposterous. Costco's membership model tends to generate plenty of additional revenue each year that the company is able to use to undercut competitors on price and keep paying members loyal to its ecosystem of products and services. I have absolutely nothing negative to say about the company's operating model.
Nevertheless, there are two reasons I'd shy away from this superstar stock in the new year.
First, there's the genuine possibility the U.S. could dip into a recession in 2024. A couple of money-based metrics with phenomenal track records suggest a downturn is likely.
Even though Costco provides basic-need goods that are going to draw members into its stores in any economic climate, discretionary spending typically declines during economic slowdowns and contractions. Costco relies on discretionary purchases to boost its razor-thin margins.
That leads to the more important second headwind: Costco's valuation. In fiscal 2023 (ended Sept. 3, 2023), the company's sales grew by 5.2%, excluding changes in gasoline prices and foreign currency. Investors are paying 39x forward-year earnings for sales growth that only marginally exceeded the prevailing rate of inflation. This is the priciest Costco stock has been in a long time, which makes it an easy one to avoid in 2024.
A Tesla Model S charging. Image source: Tesla.
Tesla
The third ultra-popular stock to give the heave-ho to for the new year is none other than the world's largest automaker by market cap, Tesla (TSLA -1.11%). Though Tesla has a lengthy history of proving naysayers wrong -- it's working on its fourth consecutive year of generally accepted accounting principles (GAAP) profit -- it's becoming increasingly harder to overlook the company's glaring flaws.
The first sign of trouble is Tesla's pricing strategy. During Tesla's annual shareholder meeting in May, CEO Elon Musk noted in response to a question from an investor that his company's pricing strategy is dictated by demand.
While there had been some hope that Tesla's wide-ranging price cuts across Models 3, S, X, and Y were due to production efficiencies, the truth appears to be that weaker demand, growing competition, and rising inventory levels are pushing Tesla to get more aggressive with its pricing. Over the trailing year ended Sept. 30, the company's operating margin has been more than halved to 7.6% from 17.2%.
Tesla has also struggled to differentiate itself from being "just a car company." Despite netting a gross profit from its energy generation, storage, and services segments, these are generally low-margin operating divisions. Tesla's profitability is reliant on the company selling and leasing EVs. At the moment, inventory levels are rising, and a significant portion of the company's pre-tax income is dependent on potentially unsustainable sources.
The final straw is Tesla's CEO. Elon Musk has found himself in the spotlight of securities regulators on a couple of occasions. What's more, he has an awful habit of overpromising and underdelivering when it comes to new innovations and EVs. It's not an enticing combination of attributes for an auto stock trading at 66x forward earnings, which is approximately 10x higher than the industry average.
Coinbase Global
A fourth widely owned stock I'd suggest kicking to the curb right now is leading cryptocurrency exchange Coinbase Global (COIN 5.68%).
Like the other companies on this list, Coinbase has enjoyed a phenomenal year. A more-than-doubling in Bitcoin, coupled with higher interest rates, which have fueled subscription revenue for the company's stablecoin segment, have sent Coinbase shares higher by 395% in 2023. I repeat, not a typo: three hundred ninety-five percent! But expecting a repeat performance in the upcoming year would be a mistake.
To begin with, Coinbase was sued by the Securities and Exchange Commission in June. Regulators have alleged that Coinbase's crypto trading platform is an unregistered national securities exchange. While there's plenty of gray area regarding the classification of cryptocurrencies as securities, this lawsuit threatens the very fabric of Coinbase's operations. Though these legal problems could take years to play out in federal court, I wouldn't feel comfortable as an investor having this much legal overhang.
Another front-and-center problem for Coinbase is that its business is driven more by sentiment and FOMO (that's the "fear of missing out") than by fundamentals. History shows that crypto exchanges struggle when the most-important underlying tokens -- Bitcoin and Ethereum -- aren't moving notably higher. Coinbase is far more reliant on consumer sentiment than it is on innovation, which is a dangerous formula.
Lastly, changes in Federal Reserve monetary policy could be deleterious to the company's rapid growth in stablecoin subscriptions. With the nation's central bank now projecting multiple rate cuts in 2024, yields from stablecoins could meaningfully decline.
Apple
The fifth and final ultra-popular stock I'd sell right now is the largest publicly traded company by market cap: Apple (AAPL -0.35%). Please, no one send this to Warren Buffett, whose company, Berkshire Hathaway, has nearly 48% ($177.3 billion) of its invested assets tied up in Apple stock.
Similar to Costco, it's hard to say anything bad about the operating model of a company that's historically delivered for its customers and shareholders. Apple has an extremely loyal customer base, a well-recognized and trusted brand, and is enjoying plenty of success as it steadily transitions to a subscription-driven future. And yet, there are still red flags.
Apple's fiscal 2023, which wrapped up on Sept. 30, featured an $11 billion decline (roughly 3%) in year-over-year sales. All of the company's physical product categories -- iPhone, Mac, iPad, and Wearables -- produced lower sales from the prior-year period. While some of this decline can be attributed to moving past the worst of the pandemic (i.e., the 27% year-over-year drop in Mac sales), a $4.9 billion drop off in iPhone sales suggests Apple's iPhone 14 missed the mark on the innovation front.
What makes Apple's sales decline even more egregious is that it came with an above-average inflation rate as a tailwind. In other words, even with strong branding and the ability to increase its prices, Apple still wasn't able to grow its sales from the prior fiscal year. Net income also fell by $2.8 billion from the prior-year period, and share repurchases were the only thing that saved Apple from an earnings per share (EPS) decline.
The nail in the coffin is Apple's multiple of nearly 30x consensus EPS in fiscal 2024. Paying an aggressive multiple on Apple would be fine if the company were growing at a double-digit rate. However, with its growth engine stalled, Apple's valuation is in nosebleed territory.
