Compounding worries over Greece and Spain are conspiring to knock an extraordinarily large number of stocks from their highs. Still, we are left with roughly 800 stocks within 6% of a new 52-week high, even after this notable 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. Amylin Pharmaceuticals (Nasdaq: AMLN ) is dancing at a new high, with speculation fueled from Bloomberg that it is once again looking to be purchased. Its key drug, Bydureon, is a once-a-week injectable treatment for Type-2 diabetes that many potential suitors are clearly interested in.
Still, other companies might deserve a kick in the pants. Here's a look at three companies that could be worth selling.
Early overvaluation detected
This isn't a case of betting against a company with a bad product; it's a simple case of overvaluation.
Genomic Health (Nasdaq: GHDX ) is a medical diagnostic company that manufactures the Oncotype DX breast cancer test. The test itself has been growing in popularity, with the company moving 15% more units than in the year-ago period. The company's latest report was also aided by higher Medicare payments received by its diagnostic colon tests. But aside from a decent amount of insider buying in March, I don't see a lot to be excited about.
Competition among life sciences companies is fierce, and it's apparent from Genomic Health's expansion plans that annual losses from charges will total $8 million for the year. Genomic doesn't provide an updated forecast with its reports, so we as investors are left to use the forecast provided at the end of fiscal 2011. Based on this and Wall Street's forward-looking estimates, Genomic Health is trading at 169 times forward earnings and a pricey 46 times cash flow.
Medical devices are a great sector to invest in for the long term, but a valuation like this is easy to pass up.
Not as super as you think
Between the rising cost of food and wage growth rising at a slower pace than inflation, it's no surprise that low-margin industries like grocery stores are taking it on the chin. Consumers simply don't have the funds to work with that they did five years ago, and that's being represented in grocery stores' results. Safeway (NYSE: SWY ) , for instance, had its gross margin dip 70 basis points as same-store sales came in flat. It's only real bright spot was cost-cutting, which drove year-over-year earnings growth.
That's the same story you'll see right now with Weis Markets (NYSE: WMK ) . Weis has actually done quite well for itself, because its smaller size allows it to react to changing consumer spending habits faster than larger chain grocery stores. Despite its best efforts, that still hasn't shielded the company from rising prices and weakening consumer spending. Considering that Weis attributed part of its growth to the unusually warm winter, and that it's investing $125 million into its fiscal 2012 growth plans, I'm more than happy to suggest bypassing this grocer until consumer spending habits improve.
You can just imagine the look of amazement on my face when almost monthly I discover yet another monstrous, leveraged ETF put out by the Direxion family of funds. This week it's time to cast off the Direxion Gold Miners Bear 3X ETF (AMEX: DUST ) .
Gold miners just can't catch a break. Many of them lagged gold's march higher, and now they're steamrolling lower, far exceeding the pace of gold's descent. At the heart of the problem are rising labor and fuel costs, as well as the exorbitant costs of building out a mine. That isn't to say a mountain of gold isn't in the ground; it's just that the costs to mine are more than many gold miners' balance sheets can handle right now.
However, we should also look at it like this: Gold would have to drop another 30% to 35% before it came close to endangering the profitability of most miners. I'm not saying miners that are highly levered to the yellow metal's price shouldn't head lower, but the magnitude of the miners' drop makes little sense to me -- about as little sense as purchasing a triple-levered gold-miner bear ETF.
There's a big, big emphasis on valuations and macroeconomic trends this week. There's no sense in betting on the further demise of gold miners with the sector already cheap, and it makes even less sense to overpay for low-margin supermarket growth or a medical-device company whose profitability is close to flatlining. 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 Genomic Health to My Watchlist.
- Add Weis Markets to My Watchlist.
- Add Direxion Gold Miners Bear 3X ETF to My Watchlist.