The stock market is a roller coaster of opportunities, offering investors various options to earn. This includes everything from fundamentally sound companies to trending firms driven by new technology or positive catalysts. Over-hyped stocks are often touted for their strong potential to revolutionize industries. Last year, we saw high flyers in sectors like tech, business services, and pharma, all showing the potential to send shockwaves through various markets and redefine how we approach business, medicine, or engagement.
However, this enthusiasm can also lead to certain stocks riding the coattails of market leaders and cashing in on the hype. This poses a high risk for investors and may result in significant losses. In this article, I will discuss three stocks that I believe have been overstretched in their price performance due to hype in their sectors or products.
To identify these stocks, I screened the market using the following criteria:
- Must operate in tech, pharma, or business services.
- Must have a year-to-date (YTD) price performance of 50% or above.
- Trades above $10.
- Has a negative earnings growth rate in the last fiscal year and a growth rate of more than 100% in the prior year.
I then sorted the list based on YTD price performance, from highest to lowest, and chose the top three. This criterion allowed me to focus on companies that are high-flyers due to optimism, even though their earnings have dropped significantly.
Cullinan Therapeutics (CGEM)
The first on my list of over-hyped stocks is Cullinan Therapeutics (NASDAQ: CGEM). Formerly known as Cullinan Oncology, this biopharmaceutical company specializes in modality-agnostic targeted therapies.
The company has a portfolio of clinical-stage assets aimed at treating oncology and autoimmune diseases. Cullinan has been in the spotlight this year after announcing the potential of its lead asset, CLN-081. While the company has been celebrating the positive reception of its autoimmune and oncology pipeline, which includes CLN-978 for systemic lupus erythematosus (SLE) and rheumatoid arthritis (RA), it also announced the discontinuation of its CLN-418 development due to unfavorable clinical observations. This warrants a second look despite the company’s strong YTD price performance of 61.14%.
Examining its financials, FY 2023, earnings dropped by 250% year-over-year after a profitable FY 2022. Additionally, there has been significant dilution in the past year, with outstanding shares growing by 46%, and insider activity has been high in the last 6-9 months. Being in the pre-revenue stage and with ongoing increases in expenses, the question is: Will the development speed in its pipeline be enough to keep investors and institutions interested, or is it time to sell while there is still some hype?
Enliven Therapeutics (ELVN)
Oncology medicine remains one of the hottest fields in the pharmaceutical space. With a disease that still hasn’t found its ultimate cure, the company that does will likely become one of the most valuable pharmaceutical firms globally. Enliven Therapeutics (NASDAQ: ELVN) aims to develop that groundbreaking drug with its lead product candidates, ELVN-001 and ELVN-002. These candidates target the oncogenic driver for patients with chronic myeloid leukemia and inhibit wild-type HER2 and its mutations.
The company recently shared positive updates and proof-of-concept data from its Phase 1 clinical trial evaluating ELVN-001 in patients. This follows its previous FDA clearance for the ELVN-002 application. While these developments sound promising, as evidenced by the company’s current YTD price performance of 56.94% and its trading above the $25 level—double its value from the start of the year—a closer look reveals some underlying issues. For example, in the last six months, there has been strong insider selling from CEO Samuel Kintz, Director Rahul Ballal, and Chief Scientific Officer Joseph P. Lyssikatos, raising warning signals.
Additionally, the company is fully dependent on funding, with no near-term revenue, posing a significant risk if trials yield negative results. FY 2023 saw earnings drop further by 118.47% year-over-year, highlighting its rising research and development costs and high burn rate. Given these uncertainties and red flags, investors might want to consider other pharmaceutical stocks with a better risk-reward profile.
Pure Storage (PSTG)
Known for pioneering the Evergreen Storage business model, Pure Storage (NASDAQ: PSTG) is a tech company specializing in enterprise flash storage. The company focuses on providing a next-generation storage platform that supports various cloud environments, processing analytics, running tests and development, backup and restoration, machine learning, and artificial intelligence. Pure Storage also offers integrated hardware systems and cloud-native storage to address the market’s growing storage needs.
The company has been one of the stocks benefiting from the rise of AI, which, like other tech stocks involved in AI, has surged due to the new technology’s potential applications. At its peak, the company’s price performance reached 105.157% year-over-year from its YTD low to its peak high. However, concerns are growing as some investors believe AI has overstretched tech stock valuations.
David Vogt of UBS commented that investors might be giving too much credit to AI, as AI models tend to be more compute-intensive rather than flash storage-intensive due to how AI models are trained. Looking closer at its financials, FY 2023 earnings slowed down by 16.66% year-over-year ($0.20 compared to $0.24) after strong FY 2022 growth of 148% year-over-year, which was its turnaround year. With the current state of AI development, we may need to see more flash storage play a key role in AI’s growth. As a result, investors may want to take a step back and evaluate whether their PSTG stocks are indeed over-hyped.
On the date of publication, Rick Orford did not have (either directly or indirectly) any positions in the securities mentioned in this article.
