Cramer: Investors should consider taking profits in ‘red hot’ tech stocks such as Zoom and Cloudflare

CNBC’s Jim Cramer on Monday advised investors to take some profits in high-flying technology stocks that have been major winners during the coronavirus pandemic, raising the specter of valuation concerns.

“Some of these red-hot growth names are absolutely worth owning into this weakness, although if you’re up huge, remember it is a sin to let a gain turn into a loss,” the “Mad Money” host said. “I don’t blame you for wanting to hang on, even if it is for dear life.”

Some of the stocks worth owning include Zoom Video Communications and insurance company Lemonade, according to Cramer, who analyzed 15 stocks that trade at more than 30 times next year’s sales estimates.

That level represents a “nosebleed valuation,” Cramer said. “Back at my old hedge fund, we used to call these high-flyers ‘red hots.’ … It means you can make a lot of money if you time it right, but if you get it wrong, you’re going to get singed, if not burned.”

Datadog, Snowflake, JFrog, Shopify and BigCommerce are among the “red hots” trading at more than 30 times sales estimates for 2021, per Cramer’s list.

Cramer acknowledged the desire to own some of the stocks and overlook valuation worries due to their growth rates in a world where technology adoption has been accelerated by the pandemic. Zoom shares, which have risen more than 700% in 2020, typify the relationship between current price and potential, Cramer said.

“Sure, it trades at 52 times next year’s sales, but it’s also got a nearly 300% growth rate for 2020. How do you value a company that’s taking over the world?” Cramer said, noting people who stayed out of the stock months ago due to valuation worries would have missed its latest move to the upside. Shares have risen nearly 75% since Aug. 31.

“I like Zoom here,” Cramer added. However, he reminded investors there is a strong likelihood the stock could pull back sharply if a vaccine to prevent the coronavirus becomes widely available, possibly allowing for the resumption of some in-person activities that moved to videoconferencing during the pandemic.

“If you’ve got a huge gain here, look, take some off and play with the house’s money,” he advised.

Cramer said investors also should consider taking profits in Cloudflare, which has seen its stock soar more than 200% in 2020. He said the stock was worth owning in June, when it traded near $30 per share. It ended Monday’s session at $58.27.

“As much as I love Cloudflare’s story, its latest move does give me vertigo. … If it ever loses its mojo and pulls back to just 25 times [sales], it’d be a $44 stock. Don’t be afraid to ring the register up here,” Cramer said.

Lemonade, which went public in July, is a stock worth buying right now after a bit of pullback, Cramer said. He noted he was cautious of the stock when it was trading above $70. But it closed Monday’s session at $58.95, which is a much better entry point, he advised.

“You can buy a bit here, but why not wait for the stock to get closer to $50 to buy even more?” Cramer said.

JFrog closed Monday’s session at $78.14, and it’s worth adding to a portfolio here, Cramer said. He noted the enterprise software provider, which went public in September, recently earned a price target of $90 from an analyst he likes at JPMorgan, Sterling Auty. “You’ve got my blessing to start buying this one right now,” Cramer said.

Several “white hot” stocks need to cool off a bit more before being bought, Cramer said. Amwell, a newly public telehealth company, is still too expensive in the mid-$30s, he said.

“I’m once again saying wait for a lower level,” he said, noting his September advice to wait for a pullback below $20, which has not happened.