5 Overrated Growth Stocks to Avoid Now

The third-quarter earnings season has been an absolute stunner. Of the 92% of S&P 500 companies that have so far reported their financial results, about 81% topped earnings estimates and 75% have beat sales forecasts. The S&P 500 has posted average earnings growth of…

39.1% and average sales growth of 17.5%. To put this into perspective, that’s the third-highest earnings growth and second-highest sales growth since 2008.

Looking forward, however, earnings momentum is tapping the brakes and slowing down for many S&P 500 companies. FactSet anticipates fourth-quarter earnings growth of 20.9% and sales growth of 12.3%. Double-digit earnings and sales growth is nothing to sneeze at, but with year-over-year comparisons growing more difficult, the stock market is growing more selective.

In other words, all the money that’s expected to pour into the stock market in the upcoming months will chase fewer stocks. The smart money will be focused primarily on companies able to maintain robust earnings and sales momentum in the current environment. Those stocks with positive analyst revisions will also garner their fair share of investors’ attention.

It’s a recipe for the cream to rise to the top — while weaker stocks get hammered.

I purposefully designed my Portfolio Grader to distinguish between the two…before the rest of the world catches on.

What I’m looking for are strong fundamentals — good margins, earnings growth, optimism from analysts. That’s the bedrock of my “Quantum A” stock-picking system. These things might sound like common sense, but far too many investors neglect them. And I find that’s often the case with growth stocks that are receiving more hype than they really deserve.

Sure, we all want growth. But often times, eye-popping revenues can hide a lot of evils, and result in much more hype than is really warranted. This sends people stampeding into exactly the wrong names.

Luckily, we can also use my Quantum A system to avoid them. Even if they looked great before.

That was the situation with Enron in the early 2000s.

How My System Detected the Biggest Financial Fraud of All Time

Before Enron became one of the most infamous stocks ever, it was a great growth play.

Enron was once America’s seventh-biggest company, but also “America’s most innovative company” in Fortune magazine (six years in a row).

And at one point, it was a big, flashing, “A”-rated buy in my system. After I recommended the stock, it gained 36%.

Then Enron’s rating started to weaken. This was well before Newsweek declared “Lights out for Enron,” in December 2001. The corruption going on at Enron was yet to be discovered — but according to my system, the fundamentals certainly didn’t justify the hype.

So, we took our profits in Enron in April. It was one of the best moves of my career, it turned out! Other investors, sadly, got wiped out. Enron’s employees lost retirement savings. But we avoided the massacre that ensued a few months later.

Now, Enron is a pretty extreme example. So let me be clear: It does not take a massive financial fraud to wipe millions of dollars from the stock market.

When a stock gets into a bubble, even a much smaller prick will do it.

With that in mind, let’s look at some growth stocks that are simply not worth your money at this time.

No list of overrated growth stocks would be complete at the moment without Amazon (NASDAQ:AMZN). The company misfired badly when it reported results in late October, falling below Wall Street’s estimates for both sales and earnings for the third quarter. The stock has also suffered this year and has fallen well below the broader market’s rise.

But it’s not much of a surprise when you look at its performance for earnings and cash flow. Just take a look at Amazon’s Report Card from my Portfolio Grader.

No wonder Wall Street analysts are pessimistic for the fourth quarter…

Meta Platforms, formerly known as Facebook (NASDAQ:FB), isn’t looking too good in my system, either…

 

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