Hurricane Sandy may have dampened Americans' spirits, but it's hardly had an impact on the number of companies trading near 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. Quanta Services (NYSE: PWR ) , as my Foolish colleague Travis Hoium pointed out, appears to be a hidden gem that will benefit from the Hurricane Sandy cleanup effort. Quanta, which repairs electrical and transmission lines, is bound to be busy over the coming weeks.
Still, other companies might deserve a kick in the pants. Here's a look at three companies that could be worth selling.
Hurricane Sandy's wake
Sometimes the damage left by a hurricane is very visible, while in other instances it's not nearly as clear. I feel that could be the case with New Jersey-based Oritani Financial (Nasdaq: ORIT ) , which operates banks within the state.
Recently, Oritani has had a lot of things going its way. Consumers have been prepaying their loans, which has resulted in rapid EPS growth and a 34-basis-point boost in net interest margins from the previous year. But there have been notable downsides as well: Higher prepayments mean the loss of quality loans and a reduced chance of continuing to grow at the same pace it's growing at now. In addition, the company's core deposits and time deposits (e.g., CDs) have been shrinking due to poor yields to consumers.
Now, tack on Hurricane Sandy's devastation of the region and I feel you can pretty much discount growth in Oritani's mortgage origination business for at least a few quarters. With a strategy focused on multifamily and commercial real estate loan growth, it could be a year or two before Oritani merits anywhere near the forward P/E of 17 it's currently trading at. Needless to say, I'm not a fan here.
If it walks like a duck...
I have to admit that I get biased by some companies' inability to produce positive results over any extended period of time (see pretty much every article I've written about Advanced Micro Devices). Often this has to do with economic cyclicality, but sometimes it also has to do with simply underperforming relative to its peers. With Telular (Nasdaq: WRLS ) , a maker of wireless equipment for security and industrial companies that connects wireline products to wireless networks, now sitting within a stone's throw of a new high, I'm betting that an earnings warning will be right around the corner.
Telular has a pretty awful history of meeting Wall Street's expectations over an extended period of time, which is compounded by the fact that few analysts cover the stock. At the moment, Telular's projected 4.4% yield is attracting investors to the stock in droves, but its payout ratio of 123% is woefully unsustainable. In addition, Telular shareholders have seen revenue sink from $93 million in 2006 to just $50 million in 2011 as the company has been operationally profitable just twice in the past decade. Telular's business is highly cyclical and there's no reason to pay nearly 19 times earnings for a company that has proven very little to shareholders over the past decade.
Hardly a secure investment
Not to harp on home security companies, but the last company facing the proverbial firing squad this week is home security provider ADT (NYSE: ADT ) .
ADT was recently spun off by Tyco International (NYSE: TYC ) , which has been divesting its assets in order to unlock shareholder value and make its earnings more transparent to investors. As my Foolish colleague Michael Lewis noted, ADT has performed very well since the recession, with revenue up 43% and cash flow rising 56% since 2009. In addition, Michael noted that ADT's recurring customers now stand at 90%.
In spite of these positives, I can't help but think that if consumer spending shrinks even further, optional luxuries like having a security system at home are likely to be one of the first things to go. Also, the wake of Sandy's devastation is likely to curb sales of security systems in the Northeast as homeowners focus more on getting their lives in order than luxury improvements to their homes. Finally, I'm having a hard time wrapping my hands around a forward P/E ratio of 23. That seems awfully aggressive for a home security provider that should be facing slowing growth in the near-term. I do feel that splitting from Tyco was a smart move, but I can't support ADT at this time.
This week's theme was split between the negative effects yet to be seen from Hurricane Sandy and a history of poor results, which doesn't seem to favor Telular.
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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