With a resolution to the U.S. debt ceiling still miles away and a long-term solution to Greece's debt troubles still not solidly on the table, it may seem odd that the S&P 500 is bucking the trend and flirting with new multi-year highs. For optimists, these rallies may seem like a dream come true. For skeptics like me, they're opportunities to see whether companies trading near their 52-week highs have actually earned their current valuations.
Keep in mind that some companies deserve their lofty valuations. Medco Health Solutions (NYSE: MHS ) vaulted to a new 52-week high yesterday following a buyout offer from larger rival Express Scripts (Nasdaq: ESRX ) . Assuming the deal faces minimal regulatory hurdles from the FTC, it would create the largest pharmaceutical benefit management company in the U.S.
Still, some other companies might deserve a kick in the pants. Here's a look at three companies that could be worth selling.
Padlock this stock
Public Storage (NYSE: PSA ) , a name I would assume many are familiar with, provides self-storage units nationwide. It has recently reaped the benefits of displaced homeowners who have had no choice but to turn to self-storage amid very high foreclosure rates. The worry I have is whether unemployment levels remaining high while foreclosure rates remain flat (e.g., they've stopped rising) could be a recipe for an earnings peak.
Public Storage is run as a real estate investment trust, meaning it must pay out at least 90% of its earnings in the form of a dividend. Currently boasting a 12-month trailing payout ratio of 106%, this means that the company is paying out more to shareholders than it's earning -- a potentially scary and unsustainable scenario for shareholders. Growth appears to be slowing for this storage giant, so paying premium prices for a company trading at 12 times sales and nearly four times book may be unwarranted. As I see it, there are plenty of safer, less-pricey dividend choices among REITs than Public Storage.
Rotten eggs
Unless the U.S. is planning to egg a foreign country the next time we declare war, now may be the time for Cal-Maine Foods (Nasdaq: CALM ) shareholders to rethink their positions. The company is the kingpin of the egg industry in the U.S., but based on analysts' expectations in the short term, this one's shell may be cracked.
Cal-Maine has some very tough upcoming quarterly comparisons. Scheduled to report its quarterly results in less than a week, the company is projected to have earned $0.21 versus the $0.88 it brought in last year. The August quarter projections aren't much better, with a loss of $0.24 projected versus a profit of $0.09 in the year-ago period. Rising costs are always a concern for Cal-Maine and are the main reason why revenue is only expected to be up 1% in 2011. With 36.7% of the company's float currently sold short, Cal-Maine is smelling less like a rose and more like rotten eggs by the day.
Bidding mania?
Shares of InterDigital (Nasdaq: IDCC ) at its peak yesterday had nearly doubled from its closing price on Monday following reports that the company is putting itself up for sale. Next to the now-bankrupt Nortel, many believe that InterDigital's cellular patents are far more valuable. The concern I have isn't whether Apple (Nasdaq: AAPL ) or Google (Nasdaq: GOOG ) make a bid for InterDigital, as many on Wall Street anticipate, but if the value already been squeezed out of the stock. I'd say resoundingly, "Yes!"
I'm not quite sure either company would be getting a great deal buying a company that's currently valued at 15 times 12-month trailing EBITDA and more than nine times sales. Meanwhile, InterDigital's revenue and net income are expected to decline by double-digit percentages this year. Too many questions remain, if you ask me.
Foolish roundup
This week was a reminder that the bottom line is indeed still the most important factor when analyzing a stock. With revenue flat to weakening at these three companies, investors may want to keep one hand on the door knob for an easier exit.
What's your take on these companies? Are they sells or belles? Share your wisdom in the comments section below and consider adding Public Storage, Cal-Maine Foods, and InterDigital to your watchlist to keep up on the latest in each stocks respective sector.
Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong. The Motley Fool owns shares of Apple, Google, Cal-Maine Foods, and Medco Health Solutions. Motley Fool newsletter services have recommended buying shares of Apple, Google, InterDigital, and Medco Health Solutions, as well as creating a bull call spread in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that never needs to be sold short.
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