Despite reeling from another disappointing jobs report and little intent from the Federal Reserve to propose further quantitative easing, about 1,500 stocks are still within 10% of their 52-week highs. 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. Wal-Mart (NYSE: WMT ) is finding itself in the sweet spot once again with its U.S. operations growing and bargain-hungry consumers returning to its stores.
Still, other companies might deserve a kick in the pants. Here's a look at three companies that could be worth selling.
Better off dead
Some companies are better off left for dead, yet here I stand, looking at Iridium Communications (Nasdaq: IRDM ) hitting a new 52-week high. The provider of cellular service across the entire globe through a network of 66 satellites went bankrupt in 2000 after spending billions to build and send its satellites into space and bringing in little revenue. Apparently, charging $7,000 for a phone and $7 per minute for service didn't fly with customers.
Fast-forwarding to the present: Iridium is back, purchased by a group of Chinese investors for literally pennies on the dollar ($25 million to be exact). Iridium is profitable and reliant on updates to its satellite network to drive growth. One update in particular, known as AxcessPoint, allows users to use their existing mobile devices to send emails and messages. However, I'm not going to forget how poorly this company was run in the past and still see few growth opportunities in the present.
Despite counting numerous airlines as customers, including Delta Air Lines (NYSE: DAL ) , Iridium's network of satellites is archaic in technology years. With download speeds of 128 kbps from its 15-year-old fleet of satellites, customers aren't exactly champing at the bit to join. Iridium's plan is to spend $3 billion upgrading the network, but it still needs to raise an additional $1 billion in funding to reach this mark -- even though it only earned $39.7 million in fiscal 2011. Even worse, this update won't even occur until 2017! I'd suggesting dropping this call before it's too late.
Dis-count me out
My love affair with dollar stores is officially over. On more than one occasion, I've driven the gavel down on Dollar General based on its premium valuation and consumers' fickle spending habits. Today, it's time to add Family Dollar (NYSE: FDO ) to the list of sell candidates.
Unlike Dollar General, Family Dollar does pay shareholders a dividend (currently equal to a 1.3% yield), which is a clear step up. The real reason Family Dollar joins the rest of its dollar brethren is that it, too, is priced for perfection.
Like all dollar stores, Family Dollar relies on consistent pricing strategies and aggressive marketing to bring bargain-driven consumers into its stores. However, dollar stores also market higher-end discretionary products that they need to sell in order to drive high-end margin expansion. If there's even the slightest hiccup in moving these higher-margin products, the dollar store sector will fall on hard times.
Last quarter, Family Dollar missed Wall Street's EPS estimates by $0.01, and we could be in for much of the same in the third quarter. The story that consumers are looking for bargains makes sense, but the valuation on these dollar stores flew out the window months ago.
To infinity and beyond
Every time I hear SciQuest's (Nasdaq: SQI ) name, I instantly think of spaceships and cheesy mid-1990s science fiction movies. Although the company does nothing that relates to space travel -- it's a source-to-settle supply chain services company -- it does have a valuation that's floating into the upper atmosphere.
To comfort the naysayers who steadfastly stand behind SciQuest's premium valuation, I will concede that it's profitable and expected to grow at 18% in fiscal 2012 and 21% next year, according to Wall Street's projections. But does that justify a trailing P/E of 157? I hardly think so.
SciQuest gets on my naughty list by providing its employees with tons of income-diluting stock-based compensation. For the year, SciQuest anticipates paying out a whopping $5.5 million in such awards, which is the reason that, despite growing sales by 15% in the first quarter, EPS actually fell! Because of these expenses and an increase in operating expenses generally in line with sales growth, SciQuest is valued at 44 times next year's earnings. It would take some serious belt tightening and operational cost controls before I'd take my underperform rating off SciQuest.
I call this week's segment "Coming back to Earth." All three companies we've looked at are priced for perfection yet exhibit notable flaws that should knock them off their perch.
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 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!