3 Stock Market Favorites Poised for a Painful Correction

As it stands right now, the stock market is full of overvalued popular stocks. Several of the highest-performing and most sought-after securities, are a byproduct of investor hype and could be due for a serious correction.

Often the easiest way to determine a stock’s overvaluation is by looking at its price-to-earnings ratio to determine whether or not its financial performance is in forming its price. If the P/E ratio is exorbitantly high or higher than the industry average, then there’s a good chance that what is driving the stock is investor excitement, which leads to an overbought position.

As such investors can protect themselves by looking directly into the quarter-over-quarter, and year-over-year growth of the metrics which determine a company’s intrinsic value. Here are three overvalued, popular stocks to sell before a correction.

Nvidia (NVDA)

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The Nvidia (NASDAQ:NVDA) pullback has subsided, with investors back on track to push the stock toward $140 a share. Proponents of the stock argue it has plenty of room to grow, and they might be right, yet I’m skeptical. While the company undoubtedly produces a unique and dominant product, how sustainable is its growth?

Presently, much of the revenue and profit growth for Nvidia stems from the demand for its data center graphics processing units, which nearly every other major tech company has some use for as the industry goes all in on artificial intelligence. Beyond this, some institutional excitement also comes from Nvidia technological improvements and its GPUs getting faster every year.

While both factors are nothing to scoff at, they might not justify the current share price, especially when seeing a P/E ratio of 75.08x. 200% growth in 12 months is stunning, but maintaining the current price could require the same growth for the next 12.

Meta Platforms (META)

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No one is arguing against Meta Platforms’ (NASDAQ:META) strong year-to-date performance with nearly 47% growth so far. Meta has continued to excel in the online messaging realm but its social media earnings may not sustain its growth. Many analysts are exceptionally bullish on the stock, with 87 buy ratings across different sites. 

Some cite its foray into AI with its proprietary large language model, and others are still excited about its augmented reality prospects, but looking back at its history, Meta doesn’t do new projects very well. Rather, the company flourishes when it buys another company’s intellectual property and uses its resources to scale it.

If AI turns out to be all it’s cracked up to be, Meta will likely sustain its growth. Yet, there’s a chance AI will hit a training wall soon as it runs out of quality data to consume. When that happens, the excitement that has driven META and other overvalued popular stocks could fizzle out. 

Nio (NIO)

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One of the major competitors in the new electric vehicle industry, Nio (NYSE:NIO) has become one of the most overvalued popular stocks over the last few years. The fear is, however, that much of this valuation stems from hype. Now pair this with regulatory hurdles and a trade war, and it seems Nio will remain confined to Asian markets.

Thus, it’s unlikely the company will achieve the volume and sales necessary to turn a profit soon. Moreover, its proprietary technologies like battery swapping and autonomous driving may not have the demand behind them to drive sales. Beyond this, investing in Chinese companies can be risky due to the protectionism and meddling of the Chinese Communist Party.

Beyond these concerns, the company has still not turned a profit in its earnings reports. It has no P/E ratio, yet investors still throw money into it hoping for positive outcomes on the other end.

On the date of publication, Viktor Zarev did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

On the date of publication, the responsible editor did not have (either directly or
indirectly) any positions in the securities mentioned in this article.