Expensive stocks often command premium valuations because the market thinks their business models are exceptional. However, the downside is that high expectations are already baked into their prices, leaving little room for error if they stumble even slightly.

Finding the right balance between price and quality can challenge even the most skilled investors. Luckily for you, we started StockStory to help you identify the real opportunities. Keeping that in mind, here are three high-flying stocks with big downside risk and some other investments you should consider instead.

Microchip Technology (MCHP)

Forward P/E Ratio: 28.1x

Spun out from General Instrument in 1987, Microchip Technology (NASDAQ: MCHP) is a leading provider of microcontrollers and integrated circuits used mainly in the automotive world, especially in electric vehicles and their charging devices.

Why Do We Avoid MCHP?

1. Annual sales declines of 2.1% for the past five years show its products and services struggled to connect with the market during this cycle
2. Projected sales decline of 9% over the next 12 months indicates demand will continue deteriorating
3. Free cash flow margin shrank by 13.4 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive

Microchip Technology is trading at $52.42 per share, or 28.1x forward price-to-earnings. Read our free research report to see why you should think twice about including MCHP in your portfolio.

Figs (FIGS)

Forward P/E Ratio: 54.4x

Rising to fame via TikTok and founded in 2013 by Heather Hasson and Trina Spear, Figs (NYSE: FIGS) is a healthcare apparel company known for its stylish approach to medical attire and uniforms.

Why Do We Think Twice About FIGS?

1. Demand for its offerings was relatively low as its number of active customers has underwhelmed
2. Estimated sales decline of 1.8% for the next 12 months implies a challenging demand environment
3. Negative returns on capital show management lost money while trying to expand the business

Figs’s stock price of $4.56 implies a valuation ratio of 54.4x forward price-to-earnings. To fully understand why you should be careful with FIGS, check out our full research report (it’s free).

PENN Entertainment (PENN)

Forward P/E Ratio: 30.2x

Established in 1982, PENN Entertainment (NASDAQ: PENN) is a diversified American operator of casinos, sports betting, and entertainment venues.

Why Is PENN Risky?

1. Muted 1.4% annual revenue growth over the last two years shows its demand lagged behind its consumer discretionary peers
2. Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 24.3% annually
3. Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value

At $16.50 per share, PENN Entertainment trades at 30.2x forward price-to-earnings. If you’re considering PENN for your portfolio, see our FREE research report to learn more.

Stocks We Like More

With rates dropping, inflation stabilizing, and the elections in the rearview mirror, all signs point to the start of a new bull run - and we’re laser-focused on finding the best stocks for this upcoming cycle.

Put yourself in the driver’s seat by checking out our Top 9 Market-Beating Stocks. This is a curated list of our High Quality stocks that have generated a market-beating return of 175% over the last five years.

Stocks that made our list in 2019 include now familiar names such as Nvidia (+2,183% between December 2019 and December 2024) as well as under-the-radar businesses like United Rentals (+322% five-year return). Find your next big winner with StockStory today for free.