With little in the way of bad news to derail the market melt-up, the major U.S. indexes have rallied for six straight weeks. For skeptics like me, that's an opportunity to see whether companies have earned their current valuations.
Keep in mind that some companies deserve their current valuations. Fifth Third Bancorp (Nasdaq: FITB ) is in full rally mode after the Federal Reserve gave the bank the OK to boost its dividend by 25% to $0.10 quarterly (for a projected yield of 2.7%) and to repurchase $600 million of its own stock. The Fed had previously rejected Fifth Third's capital plan in March.
Still, other companies might deserve a kick in the pants. Here's a look at three companies that could be worth selling.
It's not uncommon for companies across many sectors to be tied to the overall health of the economy, but few are as intricately tied to the ups and downs of the U.S. economy as Cintas (Nasdaq: CTAS ) .
The majority of Cintas' business is derived from its uniform rental and direct uniform sales division. This segment relies on strong job creation from both small businesses and large companies to drive pricing power and sales growth. The last time I checked, U.S. GDP growth had slowed to just 1.5% and hiring remained weak with unemployment levels ticking back up to 8.3%.
As more confirmation that Cintas may be topping, I'd point to the company's recent earnings report. Its retail uniform and direct-selling segments both witnessed slight dips in gross margin and the company merely met Wall Street's EPS estimates. In the previous three quarters, Cintas had surpassed the Street's expectations by no less than 10%. To me, this is a clear indication that employment conditions are tightening and that Cintas could very well be near the end of its run.
Analogous with "sell"
Once again, it appears that Apple (Nasdaq: AAPL ) is going to take the chip makers on its back and support the entire tech sector thanks to the upcoming iPhone 5, which is expected to be the greatest thing since sliced bread.
Rumors that Apple may choose a microphone developed by Analog Devices (Nasdaq: ADI ) in its next-generation iPhone have investors abuzz. We've all seen how rapidly Cirrus Logic and Nuance Communications rose with their inclusion in the iPhone's hardware, so some optimism is justified. However, based on Analog's current forward P/E of 15, I'd say the prospect of that happening is more than baked into the share price.
Let's look at this from another angle. In the third quarter, Analog Devices posted a profit that was 23% lower than the year earlier in three of its four divisions, including telecommunications, noting sizable revenue drops. Even automobile sales, which had been strong through the first six months of 2012, regressed in July, which could bode poorly for Analog Devices. With the company forecasting earnings that were at the low end of the Street's guidance, it's not a company I'd be willing to pay a premium on just because of unfounded iPhone supplier speculation.
It's amazing that I continue to find new and innovative ways to bet against a recovery in the housing sector. This week, I want to highlight timber management company and real estate investment trust Potlatch (NYSE: PCH ) .
Much like I described earlier in the week when I discussed the opportunities and pitfalls at Weyerhaeuser, which is also near a 52-week high, investors have been enamored with a slow uptick in housing prices and the steady dividend outperformance of the timber REIT sector. Potlatch's 3.7% yield is nearly double the 2% average yield on the S&P 500. But don't think for a moment I'm going to let Potlatch off the hook that quickly.
As I surmised with Weyerhaeuser, there are still a lot of homes in the foreclosure process -- enough that I suspect homebuilders will need to curtail production. In addition, with home loans still coming at a premium from lenders, I'm not seeing the same level of optimism in housing as most investors are.
Also, as my Foolish colleague Dan Caplinger pointed out, there are quite a few pension landmines out there, and Potlatch is one of them. With bond and CD rates near record lows, the company still has high expectations of 8.5% investment growth underlying its pension assumptions. That sounds like a tall order that even some of the best fund managers fail to meet.
This week's theme is all about avoiding trading on emotions. The rumor mill has Analog Devices up on a possible deal with Apple, while Potlatch and Cintas are rising on the hope that hiring will tick higher and housing will continue to rebound. All three stink of speculation to me and are enough reason to suggest avoiding these stocks for the time being.
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?
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