3 Overrated Stocks with Warning Signs

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.

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 getting more buzz than they deserve and some you should buy instead.

Opendoor (OPEN)

One-Month Return: +161%

Founded by real estate guru Eric Wu, Opendoor (NASDAQ:OPEN) offers a technology-driven, convenient, and streamlined process to buy and sell homes.

Why Do We Steer Clear of OPEN?

1. Performance surrounding its homes purchased has lagged its peers
2. Cash burn makes us question whether it can achieve sustainable long-term growth
3. Negative EBITDA restricts its access to capital and increases the probability of shareholder dilution if things turn unexpectedly

Opendoor’s stock price of $6.02 implies a valuation ratio of 1.3x forward price-to-sales. If you’re considering OPEN for your portfolio, see our FREE research report to learn more.

Home Depot (HD)

One-Month Return: +8.4%

Founded and headquartered in Atlanta, Georgia, Home Depot (NYSE:HD) is a home improvement retailer that sells everything from tools to building materials to appliances.

Why Is HD Not Exciting?

1. Disappointing same-store sales over the past two years show customers aren’t responding well to its product selection and store experience
2. Estimated sales growth of 1.4% for the next 12 months implies demand will slow from its six-year trend
3. Free cash flow margin shrank by 2.4 percentage points over the last year, suggesting the company is consuming more capital to stay competitive

At $419.94 per share, Home Depot trades at 26.8x forward P/E. Dive into our free research report to see why there are better opportunities than HD.

CVS Health (CVS)

One-Month Return: +8.6%

With over 9,000 retail pharmacy locations serving as neighborhood health destinations across America, CVS Health (NYSE:CVS) operates retail pharmacies, provides pharmacy benefit management services, and offers health insurance through its Aetna subsidiary.

Why Do We Think Twice About CVS?

1. Large revenue base makes it harder to increase sales quickly, and its annual revenue growth of 6.8% over the last two years was below our standards for the healthcare sector
2. Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 4.8% annually
3. 2.9 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position

CVS Health is trading at $70.43 per share, or 10.9x forward P/E. If you’re considering CVS for your portfolio, see our FREE research report to learn more.

Stocks We Like More

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