Each stock in this article is trading near its 52-week high. These elevated prices usually indicate some degree of investor confidence, business improvements, or favorable market conditions.
But not every company with momentum is a long-term winner, and plenty of investors have lost money betting on short-term fads. All that said, here are three overhyped stocks that may correct and some you should consider instead.
Zumiez (ZUMZ)
One-Month Return: +12.6%
With store associates called “Zumiez Stash Members”, Zumiez (NASDAQ: ZUMZ) is a specialty retailer of street and skate apparel, footwear, and accessories.
Why Do We Think ZUMZ Will Underperform?
- Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
- Revenue base of $900.3 million puts it at a disadvantage compared to larger competitors exhibiting economies of scale
- Suboptimal cost structure is highlighted by its history of operating margin losses
Zumiez’s stock price of $22.08 implies a valuation ratio of 42.5x forward P/E. Check out our free in-depth research report to learn more about why ZUMZ doesn’t pass our bar.
Cummins (CMI)
One-Month Return: +3.3%
With more than half of the heavy-duty truck market using its engines at one point, Cummins (NYSE: CMI) offers engines and power systems.
Why Does CMI Give Us Pause?
- Large revenue base makes it harder to increase sales quickly, and its annual revenue growth of 2.3% over the last two years was below our standards for the industrials sector
- Free cash flow margin dropped by 6.9 percentage points over the last five years, implying the company became more capital intensive as competition picked up
- Eroding returns on capital suggest its historical profit centers are aging
At $436.18 per share, Cummins trades at 20.3x forward P/E. To fully understand why you should be careful with CMI, check out our full research report (it’s free for active Edge members).
Brink's (BCO)
One-Month Return: -3.3%
Known for its iconic armored trucks that have been a fixture in American cities since 1859, Brink's (NYSE: BCO) provides secure transportation and management of cash and valuables for banks, retailers, and other businesses worldwide.
Why Are We Wary of BCO?
- 3.5% annual revenue growth over the last two years was slower than its business services peers
- Free cash flow margin dropped by 1.1 percentage points over the last five years, implying the company became more capital intensive as competition picked up
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
Brink's is trading at $113 per share, or 13.2x forward P/E. Read our free research report to see why you should think twice about including BCO in your portfolio.
High-Quality Stocks for All Market Conditions
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