Don't let yesterday's post-election tumble fool you -- more than a handful of companies are still within striking distance 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. President Obama's reelection is great news for hospital operators like HCA Holdings (NYSE: HCA ) , which look forward to the full implementation in 2014 of the Affordable Care Act, which should begin to protect them from bad losses currently incurred by uninsured patients who can't pay their medical bill.
Still, other companies might deserve a kick in the pants. Here's a look at three companies that could be worth selling.
Trimming the fat
Why does it seem like every three years we go through a peak and trough cycle with weight-management stocks? In 2004, 2007, and 2010, Medifast (NYSE: MED ) hit new highs only to fall dramatically after failing to meet rising expectations. If you look at NutriSystem (Nasdaq: NTRI ) , the pattern is relatively similar. Yet here we are again following a large third-quarter earnings beat from Medifast, and optimism is surging in the weight-management sector. I believe, though, it's time for these stocks to once again slim down.
Medifast, NutriSystem, and a multitude of other weight-management companies suffer from a myriad of fatal flaws. For one, customer loyalty is practically nonexistent. The average time period that consumers stick to a particular diet or exercise is relatively limited, which makes recurring revenue extremely rare. Second, food inflation costs are hammering all food-based companies, putting margin pressure on a sector that's very hesitant to raise pricing. Finally, weight-management stocks are extremely susceptible to downward cycles in economic activity. One of the first things consumers will remove from a tightening budget is optional spending such as the products that Medifast or its peers produce. To me, it seems like a mere matter of time before Medifast is cautioning investors regarding its weak outlook -- especially if its pattern holds true.
Just for sport
I have an honest question for you all: When was the last time you were in a Big 5 Sporting Goods (Nasdaq: BGFV ) ? Having a hard time remembering? Because I am as well!
According to Big 5's turnaround campaign, its new marketing efforts and pushing its Fourth of July weekend results into the third quarter from the second quarter helped boost the company's net income by 41% as revenue climbed 7% to $251.8 million. Both figures surpassed Wall Street's expectations and have caused Big 5 to soar more than 50% since its results last week. But were the results really that impressive? I don't think so!
For one thing, you heard from management that its results benefited from a shift in Fourth of July results from the second to third quarter. That's not really earnings improvement; it's just a shift. Also note that revenue rose 7% yet income climbed 41%. This means that Big 5 is becoming more operationally efficient, but cost cuts are only going to drive growth so far for the sporting goods company. Also, the company's 5.2% jump in same-store sales looks great on the surface, but had more to do with comparisons against poor-weather-related comps last year. I'm not saying Big 5 isn't taking the appropriate steps to turn its business around, but a 50%-plus move in the stock isn't warranted based on its tepid in-line EPS forecast for the upcoming quarter.
Slam the door
It's been at least a few weeks since I included another housing-related stock in this series, so I decided to end with Quanex Building Products (NYSE: NX ) , a provider of engineered and aluminum sheet products that supplies everything from housing components (e.g., window and door components) to thin-film solar panel sealants. I can't think of much that I dislike more right now than housing and solar, so this appears to be a perfect underperform selection.
To begin with, Quanex has badly missed Wall Street's EPS projections in three of the past four quarters in spite of the housing sector firming. In fact, its third-quarter results highlighted a 6% drop in revenue and a huge tumble of 83% in year-over-year EPS that was wrought with one-time expenses. Europe's continued weakness compounded with the looming fiscal cliff is more than likely enough of a reason for consumers to holster their cash over the coming months. Add on the disaster that is Hurricane Sandy, and you have every reason to run in the other direction.
This week's theme is that sometimes history really does repeat itself. Quanex's multiple quarterly EPS misses, Big 5's never-ending turnaround, and Medifast's regularly timed troubles signal to investors that they may want to walk on eggshells with these stocks near a 52-week high.
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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