You might think that following the recent shellacking the S&P 500 has taken due to weak corporate earnings, fewer companies would be near a 52-week high -- yet there's still more than 1,850 of them within 10% of a new 52-week high according to the Motley Fool CAPS Screener. 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 Lumber Liquidators (NYSE:LL), for example, which crushed its quarterly earnings expectations and raised its full-year forecast on the heels of a 12% jump in same-store sales. It's no wonder why I feel Lumber Liquidators' CEO, Robert Lynch, is a qualified candidate for CEO of the Year.
Still, other companies might deserve a kick in the pants. Here's a look at three companies that could be worth selling.
Silver screen, platinum prices
Make no mistake about it: I'm not a fan of the movie theater industry. I don't consider myself much of a moviegoer in the first place, but there just aren't enough consistent growth catalysts across the sector to merit buying these stocks for the long term. That's why I'm suggesting it may be time to part ways with Cinemark Holdings (NYSE:CNK) near its 52-week high.
Despite what you may be thinking, this underperform selection has absolutely nothing to do with the lawsuits stemming from the tragic shooting in Colorado earlier this year. In fact, Cinemark has surpassed Wall Street's estimates in three straight quarters, so if anything, it has momentum heading into the final quarter of the year.
The real reason Cinemark hits my short list has to do with overall movie ticket trends and the one-off nature of filmmaking. Movie ticket sales, according to The-numbers.com, have fallen almost annually since 2002, from 1.58 billion tickets to a projection of just 1.35 billion tickets this year. Revenue has gone up, but only marginally, as ticket prices have risen in accordance with inflation. The way I see it, the only reason movie theaters are even having a decent year relates to the success of Lions Gate Entertainment's (NYSE:LGF) Hunger Games and Twilight series. Strip these movies out (since blockbusters seem to be few and far between for Lions Gate) and it's the same-old movie theater business that's being slowly eroded by streaming content and tighter consumer spending. Cinemark isn't a particularly expensive stock, but it still doesn't merit its current valuation.
Hardly a "plan to win"
Building materials company USG (NYSE:USG) has what it refers to as a multi-pronged turnaround campaign that it's dubbed its "plan to win." The plan, which is already in place, involves divesting its European operations and strengthening its core business. Some of these efforts have already resulted in lower costs for USG, but one key component continues to elude the wall, ceiling, and roofing product company: profits!
The homebuilding sentiment index and new housing starts are higher than they've been in roughly four to five years, and yet USG is nowhere near being profitable. Since 2007, USG has failed to produce a single annual profit, and shareholder equity in the company has fallen by a staggering 95% thanks to those continued losses and $2.3 billion in debt. Even with wallboard shipments rising by 14% and average selling prices improving by 18% in its latest quarter, USG still produced a net loss after all was said and done. If it can't turn a profit now, when will it? And that's the million-dollar question that pushes USG into the underperform column.
If the shoe fits
To round out the week, I want to take aim at footwear retailer Steven Madden (NASDAQ:SHOO). The company has done an admirable job of beating Wall Street's expectations over the previous two years, and it actually boosted its full-year forecast in July thanks to an expected tax benefit. However, things have gone downhill recently, which would indicate a trend of troubled quarters ahead.
To begin with, Steven Madden's actual earnings versus the consensus have been going in the wrong direction for four straight quarters: from beats of 6% and 2% to meeting estimates two quarters ago, and finally to missing EPS estimates by 3% in its latest quarter. Management also noted that an unfavorable product mix was the primary culprit for its tumbling gross margins in that recent report -- and product mix gaffes are rarely a one-quarter event. Finally, you have consumers already tightening their belts in the spending department. Footwear retailers are used to the cyclicality of the business, and it doesn't exactly seem prudent to be purchasing Steven Madden near a 52-week high given that all these factors aren't in its favor.
This week's theme is all about following the apparent trends. Cinemark, USG, and Steven Madden may all be trending near a new 52-week high, but movie ticket trends are still slow, USG can't turn a profit, and for Steven Madden, product mix problems are usually endemic for a few quarters in the retail world. Those trends might suggest tough times ahead for all three.
Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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