3 Overrated Growth Stocks to Avoid Now

Growth stocks have been crushed amid the bear market. However, the bear market began long before most investors realize. While the S&P 500 and other major indices didn’t suffer major corrections until January 2022, overrated growth stocks began their correction about a year earlier.

It’s interesting, as there was a large divide in growth stocks. Almost all growth-oriented public firms corrected lower in the first quarter of 2021. However, only the high-quality names recovered. Many of those high-quality equities went on to hit new highs later in the year, with many powering to all-time highs in the fourth quarter of 2021.

At a glance, the growth market still looked okay, even though the leader of the group, the Arkk Innovation Fund (NYSEARCA:ARKK), was still well off the highs.

Bifurcation aside, we’re now seeing another big rally in growth stocks. Amid this move, there are some overrated growth stocks that investors should consider using caution with. Let’s look at three of them.

Coinbase (COIN)

Coinbase (NASDAQ:COIN) has already suffered a spectacular fall, tumbling 90.5% from its 2021 high to 2022 low. Ark’s Cathie Wood had championed the stock, but even she badly misplayed this one.

In July, she dumped more than 1.4 million shares at an average price of roughly $53 a share. Wood & Co. sold at a roughly 80% loss as they had a cost basis of about $255. She sold following reports of an SEC investigation.

Now though, Coinbase stock has more than doubled off its lows, rallying 163% from its June 30 low to the recent high. That said, Coinbase is a hard one for me to buy. That’s thanks to SEC investigations, a brutal bear market in cryptocurrencies and growth stocks, slashes to long-term estimates and no profitability in sight.

With the push higher, Coinbase stock recovered almost one-quarter of its peak-to-trough losses. Can it go higher still? Of course. But amid the current environment, bulls can find better selections elsewhere.

Palantir (PLTR)

Palantir (NYSE:PLTR) is a crowd favorite among retail investors, but it has been left out to dry. That’s been the case with many tech stocks. Although many investors wouldn’t consider this name one of the overrated growth stocks, I do. I never found the company’s fundamentals to justify its valuation.

Shares fell 85.6% from peak to trough and despite still being down 78.8% from the highs, Palantir stock still trades at 10.3 times this year’s revenue estimate.

On Aug. 8, the company had a chance to wow investors. It delivered approximately 26% revenue growth, which was solid. However, it reported a surprise loss of a penny per share, slightly missing expectations. Had Palantir not issued disappointing third-quarter and full-year revenue guidance, investors would have likely shrugged off the profit miss. Instead, the stock fell 14.25% in reaction.

Palantir stock is not the worst stock in the world and it may even have bottomed. But it’s not one I want to be invested at this time given the valuation.

Nikola (NKLA)

Nikola (NASDAQ:NKLA) is a stock that I never really liked, but at some point, I have to wonder if it’s been humbled enough. The company went through an embarrassing introduction to the public markets. While the stock somehow exploded to approximately $94 a share — valuing it at $23 billion — it never really proved itself.

Former founder and CEO Trevor Milton is under investigation for lying about “nearly all aspects of the business.” He recently had a new charge filed against him and Nikola is seeking to recoup the $125 million fine it was forced to pay to the SEC for Milton’s actions. So yeah, things haven’t gone all that smoothly with Nikola stock.

In the most recent quarter, EBITDA losses climbed to $94 million on revenue of roughly $18 million. The company expects to deliver 300 to 500 Tre BEV trucks this year. Even after the brutal stock performance, a $3.5 billion market capitalization still feels too rich. Maybe Nikola stock has bottomed and maybe not, but either way, I’m not a buyer.

On the date of publication, Bret Kenwell 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.