You'd think with the uncertainty surrounding the landmark Obamacare decision today and the upcoming European Summit investors would be more cautious, but that just hasn't been the case as stocks continue to rally. 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. Laboratory testing service company Bio-Reference Laboratories (Nasdaq: BRLI ) has been off to the races since reporting record quarterly revenue and a 26% boost in operating income in the second-quarter.
Still, other companies might deserve a kick in the pants. Here's a look at three companies that could be worth selling.
Discounting at a premium
Dollar-mania is sweeping the nation, and Dollar General (NYSE: DG ) is back on my list of dollar stores that we can throw out with the bathwater.
Dollar General has been a strong performer since the recession, as cost-conscious consumers have been looking for ways to scale down their spending while still meeting all of their basic food and staple goods needs. The entire sector also benefited from years of Wal-Mart's (NYSE: WMT ) miscues, as the discounting behemoth struggled within the U.S. and drifted from the low-cost strategies that had made it previously very successful. However, I see the winds of change brewing.
Wal-Mart recently reported its first same-store sales gain in apparel in three years and is more focused than ever on regaining its previous customer that it's lost to dollar stores by emphasizing its low prices and focusing domestically. It's also a bit concerning that many of these dollar stores, including Dollar General, are trading at lofty valuations when in reality their profit margins aren't all that impressive – just 5.4% over the trailing 12 months for Dollar General, with a trailing P/E ratio of 22.5! Finally, Dollar General doesn't pay its shareholders a dividend (which could have to do with the nearly $2.9 billion it carries in debt). The juice has been fully squeezed out of this orange, and I'd suggest getting out before all you're left with is the rinds.
The true value of an education
I really don't have any praise for the for-profit education sector. New government regulations which require publicly traded education companies to focus more on education, after-graduation placement, and student debt, rather than on bottom-line profits have caused sizable drops in student enrollments. Surprisingly though, there are still for-profit educators hitting new highs, like Grand Canyon Education (Nasdaq: LOPE ) .
Admittedly, Grand Canyon is a different breed than many of the struggling for-profit educators, as it's geared toward low-cost tuitions, and its educational focus is away from business degrees (which have been hit the hardest). That still doesn't put the company beyond the scope of increasing uncertainty and regulation. I personally feel that Grand Canyon's student enrollments targets, while impressive up until now, are a bit lofty considering the economic growth uncertainty we're currently dealing with. I'm pretty much holding by my stance that for-profit education companies should be sold, and Grand Canyon is just another casualty of that thought process. I see shareholders receiving little solace in owning the best company in a very bad sector moving forward.
Love the stock, hate the price
It's pretty difficult not to be hopeful about the prospects of new drugs and medical devices in the health-care sector. But liking a product does not necessarily mean that the underlying stock that makes that product or drug will be priced attractively.
Such is the case with Spectranetics (Nasdaq: SPNC ) , a manufacturer of single-use medical devices for minimally invasive cardiovascular procedures. Although the sheer number of these procedures is rising, Spectranetics' growth rate isn't all that impressive – just 12% annually over the next five years according to current analyst projections. That's a problem when the company is trading at a trailing P/E of 357 and a forward P/E of 57! The main culprit is selling, general and administrative expenses, which keep dragging down earnings despite the rise in sales. Even with the increase in gross margin, until Spectranetics can get its SG&A costs under control, it really isn't going to merit anywhere near its current valuation. Cool product, terrible valuation.
We were really all over the board this week, but if there was one common theme uniting these stocks, it would be "reason." Dollar General, Grand Canyon Education, and Spectranetics all have certain advantages over their peers, but their valuations are unreasonably high given the uncertainties that hang over their sectors.
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!