Just because the S&P 500 has had one of its worst weeks in the past three years doesn't mean there aren't companies out there with mind-boggling rallies. 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. Specialty-retailer True Religion Apparel (Nasdaq: TRLG ) wowed investors late last week with another impressive earnings beat. The company is transitioning into a brick-and-mortar retailer from simply a wholesaler of denim-based products, and shareholders have been privy to double-digit same-store sales growth along the way.
Still, some other companies might deserve a kick in the pants. Here's a look at three companies that could be worth selling.
Apparently Deckers Outdoor (Nasdaq: DECK ) can do no wrong. Deckers, the company behind the Ugg and Teva brands of shoes, reported a second-quarter loss last week, reversing a year-ago profit. Traders responded to this report, oddly enough, by sending the stock higher. Could now be the right time to bail on Deckers? I believe so.
Deckers is currently in the midst of a major European expansion which is pushing up costs and exacerbating near-term losses. Also taking a hit are the company's gross margins, which have fallen from 44.3% to 42.7%. My main concern is that Deckers' own growth projections for the Ugg and Teva lines look too optimistic. Expense control has been a worry for shareholders of late, and the worry I conveyed about Crocs (Nasdaq: CROX ) being nothing more than a fad applies to Deckers' Ugg brand as well. I'd much rather wait on the sidelines for the company to complete its expansion than risk being caught at the top by a wave of rising expenses and lower margins.
Friends don't let friends buy yen
It was only a matter of time before the Japanese government chose to get proactive and weaken its currency in relation to the dollar. With a debt-ceiling deal done, uncertainty paved the way for action, making the idea of dumping CurrencyShares Japanese Yen (NYSE: FXY ) look like a smart move.
Today, the currency ETF's shares are down about 2.5% following the Japanese intervention. That's roughly in line with what happened on two previous occasions. Last September, the Japanese government chose to intervene and the dollar appreciated between 3% and 4% that day against the yen. Earlier this year, the G-7 also intervened to weaken the yen and the subsequent two-day rally marked a nearly 4% gain for the dollar. Whether it lasts for the long term is another question -- but at least in the short run, intervention is a negative for the yen-tracking ETF.
Just days after Windstream (Nasdaq: WIN ) announced that it was acquiring PAETEC Holding (Nasdaq: PAET ) for $2.3 billion, the lawsuits have begun to roll in. By my count, in the first two days since the buyout was announced, 13 law firms have launched individual investigations into the company's fiduciary practices -- specifically whether or not management shopped the company around enough. These investigations also bring up three key points about PAETEC.
First, if these investigations turn into genuine lawsuits, it could be quite costly to shareholders. Second, with a buyout price of $5.62, I'd hardly call the 8% arbitrage potential from its current price a reasonable risk considering the possibility of impending lawsuits. Finally, PAETEC wasn't exactly a screaming value in the first place. Trading at 73 times forward earnings and 6 times book value with a debt-to-equity ratio above 1,100% doesn't make me want to own this stock.
We're all over the place with sell recommendations this week. The one aspect each company has in common is that the risks associated with each appear to handily outweigh any potential rewards. Whether it's increased expenses, potential government intervention, or legal drama, it's always best to leave your stock behind if the risks begin to outweigh your potential rewards.
What's your take on these companies? Are they sells or belles? Share your thoughts in the comments section below and consider adding Deckers Outdoor, CurrencyShares Japanese Yen, and PAETEC Holding to your watchlist.