The broad-market melt-up continues in spite of tepid global forecasts. Nearly 40% of all stocks within the CAPS database are now within 10% of a 52-week high. 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. Movado Group
Still, other companies might deserve a kick in the pants. Here's a look at three companies that could be worth selling.
Grand-Slam this back where it came from
I have a harsh reality to present to those of you who frequent America's mainstay diner, Denny's
In Denny's latest quarter, the casual-dining restaurant chain reported an 8% decline in revenue as it closed 36 total restaurants compared to the year-ago period. Profits also declined as a result of a $7.9 million credit refinancing charge. Perhaps the biggest concern is that comparable-store-sales growth was a meager 0.8% and was led by price increases rather than customer traffic. If I've learned anything about investing in restaurants over the years, it's that traffic drives growth, not price increases. Tack on worries about corn and other commodity increases eating into its margins, and I think you have all the right reasons to send Denny's back to the kitchen.
Time to pack it up?
You probably will have a hard time finding a more picture-perfect 52-week chart than you'll get with packaging materials provider AEP Industries
However, my affinity for optimism stops right there and ends with a lot of unanswered questions. To begin with, resin prices are a big part of AEP's operating expenses, and with petroleum being a primary component of some resins, higher oil prices mean higher costs for AEP. Global weakness is also a concern I worry about. Slower growth in China coupled with spending slowdowns in Europe and in the U.S. could put a damper on packaging demand. Finally, where's the incentive to own a stock that's already doubled in value? There's no dividend and, backing out the Webster acquisition, quarterly sales growth drops from the 19% reported to just 7.6% -- and even that was helped out considerably by pricing increases and not so much volume growth. Shareholders would be wise to consider packing up now before it's too late.
Forget the pessimistic view of retailer Tuesday Morning
Almost two weeks ago, Tuesday Morning reported second-quarter results that highlighted a $0.02-per-share adjusted loss and a remarkably unexciting 0.2% increase in same-store sales. Neither carrying necessity items nor being a primary remodeling stop, Tuesday Morning finds its discount products aren't exactly flying off the shelves. On top of this, the company recently fired its CEO, so it's in the midst of a management transition, and shareholders have suffered through five straight years of stagnant sales and operating margins ranging between 0.3% and 2.8%, according to data found at Morningstar. The retailer is angling to turn itself around through tight cost controls, a website revamp, and a loyalty rewards program, but the dust is collecting on its home decor products in the meantime. Until I see sustained growth, this is a retailer I'd suggest avoiding.
This week's theme is "Where's the beef?" In all three cases, either new store openings or acquisitions are hiding much weaker organic growth than is visible on the surface. With macroeconomic trends working against all three, this looks like a slam dunk case of the "sell"s.
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