Greece has once again dominated the headlines this week as the European Union continues to search for the perfect solution to an imperfect problem. This still didn't stop dozens of companies from approaching new 52-week highs. For optimists, these rallies may seem like a dream come true. For skeptics like me, they're opportunities to see whether stocks trading near their 52-week highs have actually earned their current valuations.
Keep in mind that some companies deserve their current valuations. Take Goodrich
Still, other companies might deserve a kick in the pants. Here’s a look at three companies that could be worth selling.
What a gas
Today we're going to start off with a two-for-one special: Crosstex Energy
Crosstex operates as two separate entities: a partnership and a corporation. The partnership (XTEX) operates a midstream natural gas business that includes 3,000 miles of pipeline and nine processing plants. The corporation (XTXI) owns the 2% general partner interest and a 25% limited partner interest in the partnership, along incentive distribution rights that allow it to share in the partnership's distributions when they exceed certain levels.
What these two operations do share in common is a recent, steady stream of quarterly net losses. While both entities are currently cash-flow positive, history has shown that Crosstex has struggled to control its costs. With the corporation's shares trading at nearly 275 times forward earnings and future losses expected for the partnership, this is one natural gas pipeline that could be full of hot air.
Give 'em the pink slip
The particular concern I have relates to the company's steady decline in gross margins since 2005. In that time, gross margin has fallen from 58.8% to just 45.8% over the past 12 months. This trend has also shrunk operating margins from 25% to just 8%. In short, while revenue has doubled since 2005, the company's profit per share has actually contracted. This isn't exactly encouraging news for a company richly valued at 27 times forward earnings and almost 18 times cash flow. Compare this to Accenture
The emperor's robe
KiOR, a renewable fuels company with a technology that converts biomass into renewable crude oil, has taken investors' hopes and dreams and run with them ... first out the door, then over the hill, and finally onto another planet. Investors have a nasty habit of blindly buying into alternative energy sectors only to be disappointed by the long technological and social acceptance delays attached with alternative forms of energy. We’ve seen it happen with ethanol, hybrid vehicles, and even solar panels.
As of right now, nothing leads me to believe that KiOR, which doesn’t even have its business up and running yet, is anywhere near being worthy of a $2 billion valuation. If anyone else can justify a reason to buy in here, please be my guest and state your case in the comments section below.
It's foolish (with a small “f”) to pay a premium for a company or a technology that you could just as easily get cheaper by looking at competitors or being patient. Sometimes patience is the key to a winning portfolio and these three companies could soon be very close to facing some very impatient investors.
What's your take on these three stocks: Are they sells or belles? Share your thoughts in the comments section below and consider adding Crosstex Energy, Advisory Board, and KiOR to your watchlist to keep up on the latest news with each company.