Great things are happening to the stocks in this article. They’re all outperforming the market over the last month because of positive catalysts such as a new product line, constructive news flow, or even a loyal Reddit fanbase.
However, not all companies with momentum are long-term winners, and many investors have lost money by following short-term trends. All that said, here are three stocks that are likely overheated and some you should look into instead.
Sleep Number (SNBR)
One-Month Return: +30.5%
Known for mattresses that can be adjusted with regards to firmness, Sleep Number (NASDAQ: SNBR) manufactures and sells its own brand of bedding products such as mattresses, bed frames, and pillows.
Why Should You Sell SNBR?
- Poor same-store sales performance over the past two years indicates it’s having trouble bringing new shoppers into its brick-and-mortar locations
- Forecasted revenue decline of 5.6% for the upcoming 12 months implies demand will fall off a cliff
- Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders
Sleep Number’s stock price of $10.28 implies a valuation ratio of 2.2x forward EV-to-EBITDA. If you’re considering SNBR for your portfolio, see our FREE research report to learn more.
Proto Labs (PRLB)
One-Month Return: +24%
Pioneering the concept of online quoting and manufacturing for custom prototypes and low-volume production parts, Proto Labs (NYSE: PRLB) offers injection molding, 3D printing, and sheet metal fabrication for manufacturers in various industries.
Why Is PRLB Risky?
- Muted 2.4% annual revenue growth over the last two years shows its demand lagged behind its industrials peers
- Day-to-day expenses have swelled relative to revenue over the last five years as its operating margin fell by 7.6 percentage points
- Earnings per share have dipped by 9.3% annually over the past five years, which is concerning because stock prices follow EPS over the long term
At $48.26 per share, Proto Labs trades at 32.6x forward P/E. To fully understand why you should be careful with PRLB, check out our full research report (it’s free).
Applied Digital (APLD)
One-Month Return: +41.6%
Pivoting from its origins in cryptocurrency mining to become a key player in the AI infrastructure boom, Applied Digital (NASDAQ: APLD) designs and operates specialized data centers that provide high-performance computing infrastructure for artificial intelligence and blockchain applications.
Why Do We Think Twice About APLD?
- Earnings per share fell by 78.9% annually over the last two years while its revenue grew, partly because it diluted shareholders
- Negative free cash flow raises questions about the return timeline for its investments
- Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders
Applied Digital is trading at $15.50 per share, or 39.5x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why APLD doesn’t pass our bar.
Stocks We Like More
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