The U.S. ISM index that measures manufacturing activity dipped below 50 in June for the first time since July 2009 and signals manufacturing contraction -- and still the market continues 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. Amylin Pharmaceuticals (Nasdaq: AMLN ) hit fresh highs this week as Bristol-Myers Squibb teamed up with AstraZeneca to purchase the company for $31 per share. While the deal comes at a premium, it gives Bristol's aching pipeline access to Amylin's once-a-day diabetes drug Bydureon, which appears to be on its way to being a blockbuster treatment.
Still, other companies might deserve a kick in the pants. Here's a look at three companies that could be worth selling.
Rare diseases, rarified valuation
Don't get me wrong -- I appreciate biotechnology companies focused on rare diseases and unmet medical needs as they encounter little, if any, competition and generally have a path toward double-digit growth if they price the drug accordingly and launch it successfully. However, sometimes valuation concerns get in the way of my liking for these rare-disease stocks.
Such is the case with BioMarin Pharmaceutical (Nasdaq: BMRN ) , which is currently valued at about 10 times its fiscal 2012 sales projections. The company's lead drug -- Naglazyme, a treatment for MPS-VI -- grew by 13% to $68.6 million in its latest quarter. Similarly, its Kuvan tablets for treating phenylketonuria saw sales growth of 20%. But when push comes to shove, these drugs have limited upside because the conditions they treat are so rare.
What BioMarin is really relying on is its five clinical phase trials to make it profitable. Later this year we should receive data from the company's GALNS phase 3 trial for the treatment of Morquio A Syndrome. If approved, BioMarin expects this treatment to make it profitable by the second-half of 2014. If you ask me, that's a long time to wait for a nearly $5 billion biotech to turn a profit. My advice is to make BioMarin prove its worth before buying here.
Trimming the fat
Sticking with the biotech sector, last week we witnessed what to me was the somewhat surprising approval of Arena Phamraceuticals' (Nasdaq: ARNA ) lorcaserin as a treatment for obesity, the first such FDA-approved drug in more than a decade. This week I'm going to suggest you reconsider your optimism on VIVUS (Nasdaq: VVUS ) following that decision.
Considering that lorcaserin was approved, I feel there's little question that VIVUS' Qnexa will also be approved by the FDA in July. Unfortunately for VIVUS, I had been counting on Qnexa making it to market before lorcaserin, and that may not happen. In addition, Qnexa will have to contend with competition from Arena right from the get-go, as well as successfully price and launch Qnexa. Ultimately I see the drug as a success, but even under the most utopian estimates from Wall Street, VIVUS is valued at somewhere between 30 and 40 times fiscal 2013's earnings forecasts. That's just too high a price to pay for a drug that may not launch as easily as many analysts are expecting.
A tale of unicorns and talking walnuts
Conflicting economic data is something we've become accustomed to in recent years as the U.S. economy attempts to regain its footing following the worst recession since the Great Depression. But, the data coming out of the housing sector might take the cake.
Look across the housing landscape and you'll notice that homebuilder sentiment is on the rise, new orders from all major homebuilders are up, average selling prices are rising moderately, and backlogs are increasing. If I didn't know any better, I'd say these are possible signs of a housing bottom. Luckily, I think I know better...
The Case-Shiller Index, which measures home prices in 20 large U.S. cities, has been on a precipitous decline, and my research into the housing market indicates that millions of foreclosures are ready to hit the market over the next two years. These homes are going to put an incredible amount of pricing pressure on an already fragile housing market. That's why I'd advocate dumping the ProShares Ultra Real Estate ETF (NYSE: URE ) right here, right now! Homebuilders are living in fantasyland if they think they'll have decent pricing power with so many foreclosed properties about to hit the market.
This week was all about ignoring the hype. Biotech companies BioMarin and VIVUS have a lot of hype built into their valuation, but they must first prove they can successfully bring their product to market first before I'd give them a clean bill of health. Similarly, the Case-Shiller Index needs to bottom before I'll be comfortable investing in the housing sector again.
Share your thoughts in the comments section below, 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!