According to the Motley Fool CAPS Screener, we are a stone's throw from having 2,000 stocks within 10% of a new 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. Take American Eagle Outfitters (NYSE: AEO ) , for example, which brought in a new CEO in January and has been on a no-nonsense turnaround ever since, including tight inventory control and a double-digit rise in sales. To boot, the teen retailer also boosted its full-year guidance.
Still, other companies might deserve a kick in the pants. Here's a look at three companies that could be worth selling.
I don't live by the concrete rule of thumb that says you buy a bank at half of its book value and sell at two times book value, but in the case of Texas Capital Bancshares (Nasdaq: TCBI ) , I feel it's worth adhering to.
I will gladly give credit where credit is due, as this holding company for Texas Capital Bank has performed extremely well in spite of weak U.S. job and housing growth. In its most recent quarter, net interest income rose by 27.5% over the year-ago period while provisions for credit losses dropped to just one-eighth of what it set aside last year. Total deposits also grew by a clean $1 billion over the previous year.
Where my beef lies with Texas Capital is in its valuation. At 2.65 times book value, investors are pricing in years of double-digit growth, and that just doesn't seem realistic. To begin with, its net interest margin (the difference of what it makes on the rate at which it borrows and the rate at which it lends) fell by 37 basis points in its most recent quarter. I fully expect this to tighten further with record-low lending rates offering little in the way of safe, high-yielding investments. It's also very difficult to ignore an unemployment rate that's slowly ticking higher again and a U.S. GDP growth rate that's slowing. Tack on the fact that the company just pocketed $80 million from a secondary offering and still isn't paying a dividend, and I've got all the info I need to hit the "avoid" button.
Yes... another week and another blatant attack on a timber-related real estate investment trust. This week, I'm going to focus on why it could be time to return timberland management company Rayonier (NYSE: RYN ) back to the wilderness.
The draw of Rayonier, like the previously featured timber REITs of the past few weeks, is its alluring 3.6% yield. I have to say that is noticeably higher than the previously featured Weyerhaeuser (NYSE: WY ) and Potlatch. However, the praise stops right there!
It's good that cellulose fiber sales make up about 80% of total revenue, because demand from Asia for wood products looks like it'll remain weak -- at least for the time being. Weyerhaeuser alluded to weakened wood product pricing throughout the remainder of the year, and that should go for Rayonier as well. Although Rayonier expects its cellulose fiber business to produce record profits this year, I still remain concerned with the potential for softer pricing and the higher cost of its new production facility eating into its bottom line. In short, I have a tough time paying 20 times forward earnings for a company that's going to grow in the low-to-mid single digits if the stars align just right in this economy, and I'd suggest passing.
Someone needs a dose of reality
Don't get me wrong, I'm a big supporter of biotechnology research that will improve the health and well-being of those around me. However, I also let my brain get the better of me on occasion, and I can't help but notice how frothy the valuation on the ProShares Ultra Nasdaq Biotechnology ETF (NYSE: BIB ) has been getting lately.
The last time we saw such a momentous rally in biotech stocks was in the early 2000s, when decoding the human genome was the craze. Lately, Tulipmania has transformed itself into the race to treat hepatitis C, obesity, and various other well-documented disorders that have multibillion-dollar potential. Unfortunately, a large potential market doesn't translate into guaranteed success. If you recall, many biotech companies in the early 2000s lost nearly all of their value over the following couple of years. I'm not saying things are anywhere near that bad or overvalued, but the premiums being placed on companies with little diversity are beyond comprehension. Tack on the fact that this ETF pays no dividend, costs you nearly 1% a year in management expenses, and is double-levered, and you have all the reasons you need to avoid this wealth destructor.
This week it's all about using your sense of reason. To me, it makes little sense to chase a bank at 2.65 times book value, a timber company at 20 times forward earnings and a tempered growth rate, or a double-levered biotech ETF that yields nothing to its shareholders.
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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