Stock indexes wrapped up their best January in 15 years, and nearly 1,000 stocks are within 6% of a new 52-week high. For optimists, these rallies may seem like a dream come true. For skeptics like me, they're opportunities to see whether these companies have actually earned their current valuations.
Keep in mind that some companies do deserve their current valuations. Qualcomm (Nasdaq: QCOM ) , for instance, handily beat first-quarter EPS estimates last night and boosted its second-quarter outlook thanks to the continued strength of the Apple iPhone, for which Qualcomm is a supplier.
Still, other companies might deserve a kick in the pants. Here's a look at three companies that could be worth selling.
A gassy valuation
Not many natural gas producers are happy to see prices clocking in at decade-lows. For Cheniere Energy (AMEX: LNG ) , that's a completely different story. The producer of liquefied natural gas has been using weak natural gas prices to secure long-term contracts through its Sabine Pass project in Louisiana. The concern I have is that despite these contracts, Cheniere still won't be turning a profit anytime soon.
Just look at Cheniere over the past decade -- zero annual profits and a cumulative free cash outflow of $2.7 billion in that time frame. Cheniere's infrastructure has also built up an enormous $2.96 billion pile of debt that has taken its book value from just shy of $1 in 2002 to nearly -$8.26 in the third quarter of 2011. To top things off, concerns were raised last year about whether or not one of Cheniere's subsidiaries was in default on its debt, and S&P sees a further cash crunch that could trigger a default this May. Too many questions, not enough bottom-line results if you ask me.
Where's the results?
EXACT Sciences (Nasdaq: EXAS ) and its Cologuard colon cancer diagnostic detection system is a clear case where the coolness of the science far exceeds the actual near-term results by a long shot.
EXACT Sciences is likely years away from having a viable product, despite having its colon cancer diagnostic test in late-stage clinical trials. Even if the product is approved, questions remain about its ability to successfully launch and market the diagnostic test. With no major partners funding its research and only $75 million in cash left, as Foolish colleague Rich Smith recently pointed out, it could run out of cash in three years. That's likely what prompted the company to bring another $27 million secondary offering to market last month. In fact, since 2008, EXACT Sciences' share count has ballooned by more than 55%. Personally, I wouldn't want this potential future destroyer of shareholder value anywhere near my portfolio until Cologuard is approved and the company proves it can effectively market the diagnostic test.
Clean energy, ugly performance
Sometimes I feel as if the clean energy craze has gotten out of hand. Maxwell Technologies (Nasdaq: MXWL ) , a company that markets energy storage and power delivery products, is within spitting distance of a new 52-week high. Yet it has missed Wall Street's profit estimates in five of the last six quarters now, and eight of the past 10! Maxwell hasn't even turned an annual profit in any of the past 10 years, but its outstanding share count has increased in each and every year!
I've made it pretty clear recently that I don't care for the vast majority of solar companies -- but at least a company like First Solar (Nasdaq: FSLR ) has remained profitable throughout the years, thanks to the high efficiency of its solar panels. For a company like Maxwell, it's going to take a lot more than the promise of profits and rising revenue to get me on board.
This week my three sell recommendations all share one thing in common: a long history of losses. It doesn't make much sense to chase a company higher until it can prove to you that it can regularly turn a profit. I'm so confident in my three calls that I plan to make a CAPScall of underperform on each one. The question now is: Would you do the same?
Share your thoughts in the comments section below and consider adding these three stocks to your free and personalized watchlist so you can keep track of the latest news with each company. Also, to avoid investing in stocks like these, consider getting a copy of our latest special report, "The Motley Fool's Top Stock for 2012." In this report, our chief investment officer details a play he dubbed the "Costco of Latin America." Best of all, this report is free for a limited time, so don't miss out!
- Add Cheniere Energy to your watchlist.
- Add EXACT Sciences to your watchlist.
- Add Maxwell Technologies to your watchlist.