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Between Mario Draghi and the European Central Bank's plan to buy bonds of member EU nations to improve liquidity and the growing likelihood that the Federal Reserve will introduce a third round of quantitative easing, the markets keep marching higher without fail. 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. High-power fiber-laser and amplifier company IPG Photonics (Nasdaq: IPGP ) has been in full rally mode ever since reporting blowout second-quarter results at the end of July. IPG noted a 23% rise in net income and announced it sees strong demand going forward despite macroeconomic uncertainty.
Still, other companies might deserve a kick in the pants. Here's a look at three companies that could be worth selling.
Bad for your health
There's not much to dislike about companies involved in the organic and natural food business. Whole Foods Market's outperformance has shown that consumers are more than willing to pay a premium for more nutritious food options. However, that doesn't mean that every natural and organic food producer is a walk-in-the-park "buy," which is precisely why I'd suggest not going down Annie's (NYSE: BNNY ) aisle anytime soon.
Simply put, Annie's growth rates are nowhere near robust enough to keep up with its lofty valuation. Annie's first-quarter results that highlighted a 20% increase in sales and 17% jump in net income were solid, but don't justify a forward P/E of 45 or a price-to-book of 11. Instead, I'd consider trading Annie's for a better value within the sector, Hain Celestial (Nasdaq: HAIN ) . Hain is actually poised to outgrow Annie's this year based on revenue, and trades at closer to three times book value and just 24 times forward earnings. Hain also boasts a considerably more diverse natural and organic food product line than Annie's. For Hain the math makes sense; for Annie's it doesn't -- it's as simple as that.
Heading down the drain?
Care for another example of a company that isn't a complete disaster but whose valuation might be overdone? Say hello to Chemed (NYSE: CHE ) , the owner of the Roto-Rooter plumbing business and of the nation's largest hospice providers, Vitas. In Chemed's second-quarter report, it noted a 9% increase in revenue and a 4% increase in admissions from Vitas. Chemed's plumbing business, however, continued to go down the drain with revenue and profits falling year over year. Although Chemed's valuation doesn't appear excessive on paper (just 12 times forward earnings), I have a hard time justifying why the company would head higher from here.
Considering that the full implementation of the Affordable Care Act is less than two years away, I see the potential for Medicare reimbursements falling and Vitas' costs rising as pretty likely. I also don't see any catalysts for the company's plumbing business, which keeps dragging down its results. If I were Chemed, I'd honestly consider selling the plumbing side of its business and focusing solely on its hospice operations, which offer safer long-term growth. Over the last three quarters, Chemed has missed Wall Street's EPS estimates twice and met them once -- not exactly a promising track record. To me, Chemed appears fully valued here and unlikely to outperform moving forward.
Fanning the flame of failure
I feel like I'm suffering from deja vu as I look at Bon-Ton Stores' (Nasdaq: BONT ) shoot to the moon after it reported robust August same-store sales growth of 2.2%. That's right… 2.2%! Since reporting its second-quarter results in August that demonstrated a "whopping" 0.1% increase in same-store sales, and a 120-basis-point decline in gross margin, Bon-Ton's share price has more than doubled! Are shareholders on crazy pills? Yes... I do believe they are.
As my Foolish colleague Alyce Lomax outlined last week, Bon-Ton's plans to get younger with its clothing have been a miserable failure for a handful of retailers recently -- most notably Talbots. It's also worth noting that Bon-Ton attributes most of its gains to cost-cutting, e-commerce growth, and a rebound in jewelry sales. To this I respond by saying that cost-cutting will only help the company's bottom line so far; nearly every retailer is seeing strength in their online sales, so is this really that special?; and jewelry spending could weaken over the near-term as consumer spending and credit usage decline. Furthermore, Bon-Ton still isn't profitable on a trailing basis! Needless to say, I second Alyce's sentiment in avoiding this retailer at all costs.
This week is a reminder that not every company worth selling is inherently bad -- except for Bon-Ton, which appears to be a train wreck. Chemed and Annie's both have reasonable long-term growth prospects, but there are near-term aspects that make each uniquely unattractive at their current prices.
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