Piper Sandler says own these expensive stocks and sell these others

Earnings momentum can mean the difference between whether to buy stocks that have expensive valuations or not, according to Piper Sandler. Analyst Michael Kantrowitz published two lists of stocks this week with expensive price-to-earnings multiples. The difference between them, he said, was whether they had positive upward earnings revisions. Investors want the names where estimates are moving higher as these stocks are more likely to keep trading at a lofty valuation, he said. That group was named to the “hold” list, while the others were deemed part of the “fold” cohort. “Our recommendation is to emphasize stocks with strong EPS revision momentum, as they will likely hang on to their expensive multiples longer than most,” Kantrowitz wrote to clients. CNBC Pro compiled a handful of names from each list exclusively for subscribers: The ‘hold’ list Nvidia was one of several buzzy names on the list of hold stocks. While it has a price-to-earnings multiple for the next 12 months at 36.615, it has an earnings revision ratio of 0.597. The chipmaker’s shares have climbed more than 175% this year as artificial intelligence has continued capturing investor attention. The average analyst polled by LSEG, who has a buy rating, foresees shares climbing more than 9% higher over the next year. Berkshire Hathaway also made the hold list with a 23.065 forward price-to-earnings multiple and a 0.5 ratio revision. With a 2024 gain of more than 30%, Class B shares are on track to notch their ninth straight positive year and best year since 1998. The average analyst surveyed by LSEG anticipates another 7.5% in upside. The majority of analysts have a buy rating. The ‘fold’ list On the other side of the spectrum, Home Depot made the fold list. The home improvement retailer has a negative earnings revision ratio of 0.589 on top of a forward price-to-earnings multiple of 26.691. After shares ran up more than 20%, the average price target anticipates the stock pulling back by nearly 5%, per LSEG. Still, the typical analyst has a buy rating. McDonald’s was also on the fold list, with a negative revisions ratio of 0.596 and a forward price-to-earnings multiple of 24.298. The fast food chain has underperformed this year, rising just over 5%. The average price target of analysts surveyed by LSEG reflects the potential for close to 1% in downside. Most analysts have buy ratings on the Chicago-based firm.