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. Keeping that in mind, here are three overhyped stocks that may correct and some you should consider instead.
Okta (OKTA)
One-Month Return: +19.9%
Named after the meteorological measurement for cloud cover, Okta (NASDAQ:OKTA) provides cloud-based identity management solutions that help organizations securely connect their employees, partners, and customers to the right applications and services.
Why Are We Wary of OKTA?
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Average billings growth of 9.8% over the last year was subpar, suggesting it struggled to push its software and might have to lower prices to stimulate demand
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Estimated sales growth of 9% for the next 12 months implies demand will slow from its two-year trend
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Free cash flow margin is forecasted to shrink by 2 percentage points in the coming year, suggesting the company will consume more capital to keep up with its competitors
Okta’s stock price of $80.78 implies a valuation ratio of 4.4x forward price-to-sales. Check out our free in-depth research report to learn more about why OKTA doesn’t pass our bar.
Wendy’s (WEN)
One-Month Return: +17.5%
Founded by Dave Thomas in 1969, Wendy’s (NASDAQ:WEN) is a renowned fast-food chain known for its fresh, never-frozen beef burgers, flavorful menu options, and commitment to quality.
Why Do We Pass on WEN?
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Disappointing same-store sales over the past two years show customers aren’t responding well to its menu offerings and dining experience
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Estimated sales growth of 1.1% for the next 12 months implies demand will slow from its seven-year trend
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7× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
At $8.11 per share, Wendy’s trades at 14.2x forward P/E. Dive into our free research report to see why there are better opportunities than WEN.
Xerox (XRX)
One-Month Return: +66.3%
Pioneering the modern office copier and inventing technologies like Ethernet and the laser printer, Xerox (NASDAQ:XRX) provides document management systems, printing technology, and workplace solutions to businesses of all sizes across the globe.
Why Is XRX Risky?
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Muted 1.5% annual revenue growth over the last five years shows its demand lagged behind its business services peers
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Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
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High net-debt-to-EBITDA ratio of 7× could force the company to raise capital at unfavorable terms if market conditions deteriorate
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