But while the stock market has been doing well, there are quite a few shares I am actively avoiding. Here are three of them.

Palantir Technologies

First up, Palantir Technologies (NASDAQ: PLTR). Up 1,844% in five years, Palantir stock has been a star performer in recent years.

The company’s specialism in harnessing powerful insights from big data has helped it land contracts with a welter of clients around the globe. The longer they stick with Palantir, the more reliant I expect them to become on its technology. That gives the company substantial pricing power.

Over time, this could turn out to be a highly profitable business model. But there are a few things that put me off adding Palantir stock to my portfolio.

One is that I am not sure I fully understand its technology, which makes it hard  for me to assess how sustainable its competitive advantage is.

Another is valuation. Selling for 594 times earnings, the company looks wildly overvalued to me.

Can it possibly deserve its $424bn stock market capitalisation? Time will tell.

Carvana

Compared to that, the price-to-earnings (P/E) ratio of just under 100 at Carvana (NYSE: CVNA) may look less stretched. Still, that sort of dizzying valuation multiple looks far too expensive for me.

Carvana has had an incredible few years from an investment perspective. In 2021, its share price touched $360. By the start of 2023, it had fallen under $5 a share – but has since bounced back to over $400 a share at its high point over the past year.

Why so much volatility?

Carvana’s model of buying, selling and financing used cars helps it tap into a huge market. If it can become the dominant digital platform in that space, the opportunity is massive.

But this is an area where careful car price and creditworthiness assessment is crucial. The recent collapse of US subprime car loan specialist Tricolor may be an early warning sign that the wider car financing industry could start to wrestle with higher delinquency rates from borrowers. That may be bad for Carvana.

Ocado

It is not only Stateside that some stock market valuations are making me nervous.

I continue to avoid UK digital retailer and ecommerce platform vendor Ocado (LSE: OCDO).

The Ocado share price is down 31% this year. That headline figure obscures another volatile ride. Between July and August it soared almost 70%, before since crashing back to earth.

The reason? Ongoing uncertainty about whether the company’s business model can start to generate free cash flow consistently.

Ocado said over the summer that it expects to turn cash flow positive next year.

If it achieves that – and keeps doing so – I think the share price could soar. Its installed client base and bespoke technology should help it along the way.

But the company has been a money pit for so long that I will not be putting a penny into it just on the strength of a business projection. I would first like it to achieve free cash flows before even thinking about investing.

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One Nasdaq stock that’s now being talked up as having 100-bagger potential is Opendoor Technologies (NASDAQ: OPEN). It has been doing the rounds on Reddit’s WallStreetBets page, where retail traders gather to discuss meme stocks and other high-risk trading strategies.

This recent attention has seen the Opendoor share price surge 349% in just one month. Traders are comparing the stock to Carvana (NYSE: CVNA), the online used car retailer whose shares have exploded by nearly 7,200% since the start of 2023.

That means anyone who invested $14,000 back then is sitting on $1m today.

Similarities

To be fair, I do see a couple of similarities. Opendoor buys and resells homes, while Carvana buys and resells used cars. Both operate in capital-intensive industries and have relied on debt to fund growth.

Back in 2022-23, when interest rates soared, the cost of carrying that debt ballooned and both found themselves in trouble. Their survival was in doubt (Carvana came close to bankruptcy).

Yet, while Carvana has performed a Lazarus-like resurrection from its 98% stock plunge between 2021 and 2022, Opendoor remains 93% beneath its all-time high. Therefore, it has the potential to do a Carvana, according to the meme stock traders.  

Running the numbers

Looking at the numbers though, that’s where the similarities end for me. Carvana reported $13.7bn in revenue in 2024, which was 27% higher than the year before. Crucially, it generated a profit, and earnings per share are forecast to rise 60% this year and 24% in 2026.

By contrast, Opendoor has never turned a profit. Revenue slumped nearly 26% last year to $5.2bn, and is expected to decline another 5% this year. And while Wall Street expects solid revenue growth after that, profits remain absent as far as the eye can see.

The business model of flipping houses in America hasn’t been proven to work profitably yet, at least for Opendoor. This makes the stock very risky (and why it was trading for less than $1 just last month).

Of course, if the firm makes great strides down the path to profitability, the stock could do really well. Conversely, Carvana may struggle if a US recession negatively impacts the car-buying market. It’s also trading at a premium 42 times forward earnings.

But looking at both stocks as a long-term investor, I much prefer Carvana. It’s at least profitable and is growing at a faster rate than Opendoor.

The online car retailer also still has its founder-CEO in charge, which I like to see, whereas Opendoor’s founder left the firm in 2024.

Final thoughts

Of course, I accept it’s perfectly possible that Opendoor rockets much higher in the near term. Meme-stock rallies can defy logic and make traders a lot of money. Good for them, I say.

But I’m writing from the position of a long-term investor (with a horizon of five to 10 years). And over that period, I don’t see Opendoor becoming the next millionaire-maker stock.

I see far more attractive candidates elsewhere for building wealth in my own portfolio.

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Clearly, I was not the only one who struggled with the commercial logic. Between August 2021 and December 2022, Carvana stock lost 99% of its value.

At that point, I am sure a lot of investors must have wondered if things were over. Far from it. In little over two years, the growth stock has soared 6,398%.

What on earth’s going on with this valuation?

That means Carvana is now trading on a price-to-earnings (P/E) ratio of over 28,000. Yes, you read that correctly.

Created using TradingView

Still, at least it made a profit last year. That came after many years of losses.

Created using TradingView

But… a P/E ratio in tens of thousands? Has the US market gone totally mad?

Not necessarily. Carvana has a market capitalisation of $55bn. Clearly there is some serious money invested here.

The company has developed an innovative business model at scale. In its most recently reported quarter, it sold 109,000 cars and generated revenue of $3.7bn.

When the growth stock crashed that reflected a number of risks: volatile pricing in the second hand car market, concerns about the quality of Carvana’s loan book, its ability to keep servicing it, and the company’s losses at that point.

Now, investors seem to be looking from the other side of the lens. Carvana is profitable and growing fast. It has economies of scale that in a platform model like this can be a virtuous circle.

The more buyers and sellers it serves, the better it understands the market and the stronger its offering for consumers becomes. (Although the business model is different, this sort of platform-based virtuous circle can be seen on this side of the pond at Auto Trader).

I’m not going anywhere near this

However, while the 99% crash now looks overdone in retrospect, I also am sceptical that the 6,398% share price growth is reasonable.

Although Carvana is profitable, that is on an accounting basis. It was still lossmaking at the operational level in its most recent full-year results.

Seeing this purely as a car trading platform (similar to, say, eBay) misses a large part of what attracts investors – and also what I think is a key risk.

Carvana’s model is as much (or more) about being a financing company as it is about buying cars, reconditioning them and selling them on.

That large book of auto loans concerns me. Carvana has been heavily reliant on reselling them to one buyer (Ally Financial). That causes a big concentration risk, should the relationship between Carvana and Ally sour.

Even beyond that though, US car loans historically have higher default rates than some other types of borrowing like home mortgages.

In a weak economy I expect used car loan default rates could grow, making it harder for Carvana to offload its loans onto Ally (or anyone else) at an attractive price.

The risks here are well above my comfort level, even for a US growth stock. I have no plans to invest.

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