The stocks in this article are all trading near their 52-week highs. This strength often reflects positive developments such as new product launches, favorable industry trends, or improved financial performance.
But not every company with momentum is a long-term winner, and plenty of investors have lost money betting on short-term fads. On that note, here is one stock we think lives up to the hype and two that may correct.
Two Stocks to Sell:
Target Hospitality (TH)
One-Month Return: +31%
Building mini-communities at places such as oil drilling sites, Target Hospitality (NASDAQ: TH) is a provider of specialty workforce lodging accommodations and services.
Why Do We Steer Clear of TH?
- Performance surrounding its utilized beds has lagged its peers
- Earnings per share fell by 3.7% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
Target Hospitality is trading at $9.32 per share, or 15.4x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including TH in your portfolio.
The Pennant Group (PNTG)
One-Month Return: +3.1%
Spun off from The Ensign Group in 2019 to focus on non-skilled nursing healthcare services, Pennant Group (NASDAQ: PNTG) operates home health, hospice, and senior living facilities across 13 western and midwestern states, serving patients of all ages including seniors.
Why Are We Hesitant About PNTG?
- Modest revenue base of $941.5 million gives it less fixed cost leverage and fewer distribution channels than larger companies
- Low free cash flow margin of 2% for the last five years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
- High net-debt-to-EBITDA ratio of 6× could force the company to raise capital at unfavorable terms if market conditions deteriorate
The Pennant Group’s stock price of $32.85 implies a valuation ratio of 25.6x forward P/E. Dive into our free research report to see why there are better opportunities than PNTG.
One Stock to Watch:
Vertex Pharmaceuticals (VRTX)
One-Month Return: -1.6%
Founded in 1989 with a mission to create medicines that treat the underlying causes of disease rather than just symptoms, Vertex Pharmaceuticals (NASDAQ: VRTX) develops and markets transformative medicines for serious diseases, with a focus on cystic fibrosis, sickle cell disease, and pain management.
Why Should VRTX Be on Your Watchlist?
- Annual revenue growth of 14.1% over the last five years beat the sector average and underscores the unique value of its offerings
- Impressive free cash flow profitability enables the company to fund new investments or reward investors with share buybacks/dividends
- Market-beating returns on capital illustrate that management has a knack for investing in profitable ventures
At $469.52 per share, Vertex Pharmaceuticals trades at 24.9x forward P/E. Is now the time to initiate a position? Find out in our full research report, it’s free.
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