With about 30% of all stocks in The Motley Fool CAPS database within 8% of a new 52-week high, is there any doubt that we're overdue for a reasonable correction? 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. Arris Group (Nasdaq: ARRS ) finally appears to be getting its act together as its sales rose 13% and its profits 19% in its latest quarterly report. Perhaps the biggest news to note for the bulls was a $100 million increase in its order backlog.
Still, other companies might deserve a kick in the pants. Here's a look at three companies that could be worth selling.
Just say "nay" to this stock
Stop me if you've heard this one before: "I think cloud plays are brutally overvalued." I plan to kick off this week by again focusing on what I believe to be another overvalued cloud play, BroadSoft (Nasdaq: BSFT ) . The company -- which allows mobile, fixed-line, and cable users to deliver information across IP-based networks -- has been nothing short of phenomenal in the earnings column over the trailing-12-month period. BroadSoft has crushed Wall Street expectations over the past four quarters and boasts a five-year projected growth rate of almost 22%. But the downside to this success is that its valuation has climbed into the stratosphere.
As I write this, BroadSoft is trading at nine times book and sales, but an even more egregious 27 times forward earnings and 43 times cash flow. Other aspects of BroadSoft that have me concerned are the 32 insider sales without a single insider purchase over the past six months. Also, don't forget to take into account what other investors' think about the stock. With a quarter of shares held by short-sellers, clearly I'm not the only one worried about BroadSoft's valuation. As a simple numbers game, I doubt BroadSoft can keep up its torrid growth pace much longer.
Unfriend this ETF
If Facebook paying $1 billion for Instagram is within the normal range of valuations for social media companies, then something is severely wrong with the accounting method. It's for that reason that I'm bucking Facebook-mania and suggesting that it's time to dump the Global X Social Media Index (Nasdaq: SOCL ) .
Although Instagram, which is still less than 2 years old, has been adding members at a faster rate than LinkedIn (NYSE: LNKD ) -- 1.6 million per month versus 1.4 million -- the fact remains that many social sites are simply paying too much to gain users. Groupon is valued at roughly $265 per user, while Facebook commands a valuation of $118 per user. I think those are absurdly high and unsustainable valuations. When the Facebook euphoria wears off, I'll be there to yell, "Look out below!"
When it's bad to be the king
It's usually a good thing to be the king... that is, unless your Carrols Restaurant Group (Nasdaq: TAST ) and you've just agreed to become Burger King's largest franchisee by purchasing 278 of its U.S. locations. The last time I checked, Burger King's U.S. operations were doing poorly, and the chain had lost the No. 2 spot in hamburger sales to rival Wendy's for the first time in 40 years.
In addition to laying out a significant amount of cash to buy into Burger King's ailing business, Carrols also announced that it would taking a charge in its upcoming quarter to close five restaurants under its Pollo Tropical brand. And this company is trading near a 52-week high? Considering that Carrols widely missed consensus estimates last quarter and it boasts an unhealthy amount of debt relative to cash on hand, I'm more than happy sending this one back to the kitchen.
This week it's all about unrealistic expectations. BroadSoft and social media investors are playing with fire given the hype surrounding that sector, while Carrols group is throwing money at a shrinking brand and expecting a miracle. 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!
- Add BroadSoft to My Watchlist.
- Add Global X Social Media Index to My Watchlist.
- Add Carrols Restaurant Group to My Watchlist.