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3 Overvalued Bubble Stocks To Bet Against In 2022 Before The U.S. Recession (ARKK, AFRM, SHOP)

3 Overvalued Bubble Stocks To Bet Against In 2022 Before The U.S. Recession (ARKK, AFRM, SHOP)

overvalued stocks

Photo: Trader Thomas Lee works on the floor of the New York Stock Exchange, Dec. 9, 2021. (AP Photo/Richard Drew)

With the S&P 500 down more than 10 percent so far this year, some household-name stocks have been pummeled, suggesting they are overvalued. For example, Meta is down 39 percent and Netflix is down 40.43 percent year-to-date.

The Nasdaq Composite index—a proxy for the U.S.-listed technology sector—is firmly in correction territory — the sixth-worst start to a year, according to strategists at LPL Financial — and the prospect of higher interest rates and tighter monetary policy could make it even tougher.

Many fast-growing innovation bubble stocks that have little-to-no profits but saw a boom in business amid the pandemic have crashed more than 80 percent from their record highs, trading below their pre-pandemic levels.

Soaring inflation, the Russian invasion of Ukraine and supply chain shocks from an upsurge of covid-19 in China are giving U.S. investors cause for concern that the stock market could be overvalued.

A rising chorus of voices predict that a recession is coming.

Stocks endured a terrible start to 2022 but the pullback still does not look like a great buying opportunity, per the Buffet indictor, a tried-and-true measure of the the ratio of total U.S. stock market valuation to GDP.

The Buffet indictor is “the best single measure of where valuations stand at any given moment”, according to its namesake, the legendary investor Warren Buffett, who has since walked back that comment, saying no single measure is comprehensive or consistent over time. The indicator divides the Wilshire 5000 Index (viewed as the total stock market) by the annual U.S. GDP, which is still hovering around a record high, even as stock prices are well off their record levels.


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As of April 8, 2022 the Buffett Indicator was close to historical, all-time highs at 53 percent (or about 1.7 standard deviations) above the historical average, suggesting that the market is overvalued, according to CMV (CurrentMarketValuation.com):

Aggregate US Market Value: $48.1T
Annualized GDP: $24.1T
Buffett Indicator: $48.1T ÷ $24.1T = 199 percent

“The stock market is significantly overvalued according to the Buffett Indicator,” said researchers at GuruFocus. “Based on the historical ratio of total market cap over GDP, it is likely to return 0 percent a year from this level of valuation, including dividends.”

Here are three overvalued bubble stocks that investors can bet against in 2022:

1. ARKK Innovation ETF

ARKK Innovation ETF, an exchange traded fund that pools tech-driven stocks or those that benefit from technological changes, has lost more than 50 percent, or $13 billion, of its value year to date to trade at $59.54.

The fact the ARKK failed to make it into the 10 best stocks for investors to buy right now, compiled by Motley Fool Stock Advisors, is sign that all is not well. A report by Barron’s said that the selloff on ARKK EFT looked more and more like the worst of the Dot-Com bubble burst…and could get worse.

Cathie Wood, founder and CEO of ARK Investment Management LLC, which manages the ARKK ETF, has remained strong willed about the prospects of the fund and even managed to convince investors to plow more than $2 billion into the pool. Wood’s flagship fund is now down nearly 63 percent from its February 2021 high.

2. Shopify

Shopify Inc. (SHOP), touted as “Amazon Junior” due to its foray into e-commerce, has lost as much as 48 percent this year, erasing about $83 billion in market value, according to Yahoo! Finance.

The Ottawa-based Shopify has given up most of the gains it made during the pandemic when consumers, under lockdown restrictions, turned en masse to online shopping. Analysts predict that Spotify’s annual sales will increase 31 percent in 2022, which sounds good, but that number will be down from the 57 percent growth Shopify enjoyed in 2021.

At a pre-covid price of $605.44, Shopify shares look attractive to bargain buyers but analysts predict that it is unlikely to rise anywhere near its record high of $1,690.60 on Nov. 19, 2021.

3. Affirm

Affirm (AFRM), a leading U.S.-based buy-now-pay-later (BNPL) lender, has plummeted more than $35 billion in capitalization in the last five months despite posting phenomenal growth numbers, according to an Observer report. The share price is down 60.53 percent, trading at $37.14, according to Yahoo! Finance.

The U.S. market leader in BNPL, Affirm continued to post as much as 77 percent annual revenue growth, but the market has been punishing its stocks on jitters over tech stocks. The war in Ukraine has not made it any better for Affirm.

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“The market seems to be having a bit of an identity crisis. We are certainly not,” Max Levchin, Affirm’s founder and CEO, told Bloomberg News in mid-February.

On March 11, Bloomberg reported that Affirm had delayed a proposed asset-backed securities sale after a good portion of it had already been sold to money managers.

Analysts at Moffett Nathanson said on April 5 that Affirm’s “longer-term growth trajectories are likely to disappoint.”

Photo: Trader Thomas Lee works on the floor of the New York Stock Exchange, Dec. 9, 2021. (AP Photo/Richard Drew)