Proceed With Caution When Considering These 3 Ultra-Popular Stocks | The Motley Fool Canada

Proceed With Caution When Considering These 3 Ultra-Popular Stocks

Ultra-popular stocks like Shopify Inc (TSX:SHOP) are sometimes very risky.

| More on:
Caution, careful

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

If you invest in stocks, there’s a good chance you have a preference for popular names over obscure ones. It’s human nature to buy what’s popular. If a stock is popular, it gets more publicity, more research coverage, and more ratings than an unpopular stock does. As a result, you’re a lot more likely to hear about it.

However, to make money in the stock market, you need to buy low and sell high. Viewed in this light, popular stocks can be problematic. If everybody and their dog is already invested in a stock, then how is the stock supposed to rise higher?

Ultimately, both popular and unpopular stocks can do well. A stock is never so popular that the entire planet’s disposable income is invested in it, so there’s always potential for gains. However, such stocks do tend to be more expensive than their overlooked peers.

In this article, I will explore three popular stocks that, while not necessarily bad buys, merit more caution than their cheaper peers.

Shopify

Shopify (TSX:SHOP) is a Canadian tech stock that has fallen 80% in price, yet is still arguably expensive. At today’s prices, the stock trades at 8.2 times sales and five times book value (book value means assets minus liabilities). These valuation multiples are higher than average, suggesting an expensive stock.

Back in 2020 and 2021, SHOP was even more expensive than it is now. In those days, the stock would often trade at 50 or 60 times sales! During the worst months of the pandemic, Shopify was growing sales at 90% year over year, as the pandemic forced retail businesses to shut down, driving customers to online stores. Today, Shopify no longer has that tailwind behind it, and it is growing slower as a result.

Created with Highcharts 11.4.3Shopify PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.ca

Tesla

Tesla (NASDAQ:TSLA) is another stock that falls into the “expensive” category. At today’s prices, it trades at 61 times earnings, 9.4 times sales, and 18 times book value, which is far more expensive than Shopify. On the plus side, Tesla still has strong growth: in its most recent quarter, Tesla’s sales grew at 55% year over year.

Tesla stock is risky both due to its valuation and because it is involved in a lot of controversies. Its chief executive officer (CEO) Elon Musk recently bought Twitter and is now acting as that company’s CEO. Some think that Elon Musk will not have the time to give Tesla enough attention when he is also fully dedicated to running Twitter. Additionally, Tesla has faced some legal issues over the years, stemming from safety concerns, over-promising about the self-driving (FSD) feature, and other things. For this reason, its stock could be considered riskier than average.

Amazon

Amazon (NASDAQ:AMZN) is a stock that has done extremely well over the decades. Since the year 2001, it has risen over 10,000%! This company has made a lot of people wealthy, but it isn’t without its risks.

Even though Amazon is a relatively mature company, it is not consistently profitable. Amazon had positive net income in its most recent quarter (though significantly declined), while its free cash flow was negative. Some think that free cash flow is a better “profit” metric than net income, because it better reflects day-to-day cash revenue and costs. Given Amazon’s negative cash flows, investors would be advised to proceed with caution.

Should you invest $1,000 in The Bank of Nova Scotia right now?

Before you buy stock in The Bank of Nova Scotia, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and The Bank of Nova Scotia wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $18,391.46!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 35 percentage points since 2013*.

See the Top Stocks * Returns as of 1/7/25

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Fool contributor Andrew Button has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Shopify. The Motley Fool recommends Amazon and Tesla. The Motley Fool has a disclosure policy.

If You Thought Apple and Microsoft Were Big, You Need to Read This.

The steel industry produced the world's first $1 billion company in 1901, and it wasn't until 117 years later that technology giant Apple became the first-ever company to reach a $1 trillion valuation.

But what if I told you artificial intelligence (AI) is about to accelerate the pace of value creation? AI has the potential to produce several trillion-dollar companies in the future, and The Motley Fool is watching one very closely right now.

Don't fumble this potential wealth-building opportunity by navigating it alone. The Motley Fool has a proven track record of picking revolutionary growth stocks early, from Netflix to Amazon, so become a premium member today.

See the 'AI Supercycle' Stock

More on Investing

Transparent umbrella under heavy rain against water drops splash background. Rainy weather concept.
Dividend Stocks

3 Canadian Defensive Stocks to Buy for Long-Term Stability

If you want long-term stability, then go on the defence with these three defensive stocks.

Read more »

Blocks conceptualizing Canada's Tax Free Savings Account
Dividend Stocks

TFSA: 4 Blue-Chip Stocks to Buy and Hold Forever

Buy and hold these blue-chip stocks in your TFSA portfolio for steady capital gains, stability, and regular dividend income.

Read more »

Canadian dollars are printed
Dividend Stocks

Got $25,000? Transform a TFSA Into a Cash-Gushing Machine

If you're looking to make a TFSA that just pumps out cash, this diverse portfolio is your prime option.

Read more »

Dividend Stocks

Got $1,000? 3 REITs to Buy and Hold Forever

If you have an extra $1,000, consider building a passive-income stream from these REITs.

Read more »

concept of real estate evaluation
Investing

Better Real Estate Stock: Allied Properties vs SmartCentres?

Here's how these two REITs stack up and what I would invest in instead.

Read more »

happy woman throws cash
Stock Market

Canadian Stocks That Surprised Investors in 2024 

The year 2024 was a mixed bag of predictable growth and surprises. Three Canadian stocks surged 30-50% in a year…

Read more »

Start line on the highway
Dividend Stocks

Dividend Fortunes: 2 Canadian Stocks Leading the Way to Retirement

These Canadian dividend stocks with consistent dividend growth and resilient earnings base are ideal for a financially secure retirement.

Read more »

tsx today
Stock Market

TSX Today: What to Watch for in Stocks on Monday, January 20

With the U.S. market closed, the TSX may see lighter volumes today but investors will keep an eye on President…

Read more »