For those of you expecting the market to collapse, may I remind you that Super-Apple was once again here to save the day! For optimists, these rallies may seem like a dream come true. For skeptics like me, they're opportunities to see whether companies have earned their current valuations.
Keep in mind that some companies deserve their current valuations. LeapFrog Enterprises
Still, other companies might deserve a kick in the pants. Here's a look at three companies that could be worth selling.
The wishing well
The new biotech fad appears to be piling on companies that specialize in rare diseases. The allure of biotech companies that can master this strategy is a lack of competition and incredible pricing power, but it rarely results in pipelines you can trust. Case in point: Synageva BioPharma
Synageva's leading drug candidate is SBC-102, an experimental drug targeting early and late-onset lysosomal acid lipase deficiency. It's true that if Synageva gets this drug approved, it will hold a monopoly on this treatment, but the company doesn't have any other drugs in clinical trials. Investors are essentially betting the farm on four preclinical treatments and one phase 2 clinical trial. That is far from a sure thing. With an accumulated deficit of $116 million and an operating loss expectation of $40 million-$45 million in 2012, I don't see any reason to be excited about Synageva, considering it's up 600% from its 52-week low.
We want to deflate...you down!
If you're a fan of health fitness stocks, turn away now, because I'm about to bash yet another one. This week, Town Sports International
For the quarter, this operator of health clubs in the northeastern U.S. increased comparable club revenue by 4.5% over the year-ago period and more than doubled its net income. But the concern I have relates to its pricey valuation, considering many aspects of its business are slow-growing and subject to high attrition rates based on changing consumer spending habits. Health club and diet operators often have a hard time keeping customers interested in their programs, and we did indeed see a 20-basis-point uptick in customer attrition during the quarter.
Also worth noting is that membership fees dropped during the quarter, which to me signals that the company has very little pricing power. If it can't improve its margins, then I'm definitely not interested in Town Sports at 48 times trailing-12-month earnings.
Change for a dollar
The scent of change is in the air among dollar store chains, and it has investors biting their nails with worry. Perennial underperformer Big Lots'
All of this bodes poorly for the not-so-cheap dollar stores, especially Dollar Tree
This week it's all about the winds of change: Whether it be changing consumers' spending habits or changing investors' perceptions about a biotech's pipeline. I'm so confident in my three calls that I plan to make a CAPScall of underperform on each one. The question is: Would you do the same?
Share your thoughts in the comments section below, and consider using the following links to add these three stocks to your free and personalized watchlist so you can keep track of the latest news on each company. And to avoid investing in stocks like these, consider getting a copy of our special report "The Motley Fool's Top Stock for 2012." In it, 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!