Even with market indexes pulling back markedly from their yearly highs, there are still some 1,400-plus companies within striking distance (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. Lloyds Banking (NYSE:LYG), for instance, has rallied to a new 52-week high as its losses are narrowing and the quality of loans in its mortgage portfolio are improving. At just 71% of book value, investors are snapping up a potential bargain bank overseas.
Still, other companies might deserve a kick in the pants. Here's a look at three companies that could be worth selling.
Cementing big gains
I know what you're thinking: "He's not going to talk negatively about homebuilding suppliers again, is he?" The answer is once again, "Yes!"
Today's head-scratcher is Texas Industries (NYSE:TXI) a supplier of cement and heavy construction products. Texas Industries has been in full-on rally mode for the past few months as home prices have stabilized and homebuilders have reported higher sale orders and backlogs. I can somewhat understand the move higher because it should lead to an uptick in the company's volume of products being sold (which we have seen), but there are plenty of other factors that simply aren't falling into place.
Gross margin, for instance, has improved as the company has moved to cut costs and make its operations more efficient. What that margin improvement hasn't done is make Texas Industries profitable. In fact, the company has missed Wall Street's earnings estimates in three of the past four quarters, hasn't been consistently profitable on a quarterly basis since 2008, and even then only produced positive free cash flow in three of the last 10 years. It makes me wonder just how good things need to be in the housing industry for Texas Industries to turn a profit.
The final nail in the coffin is cement prices, which actually fell $0.35 per ton (less than a 1% drop) year over year. Cost-cutting and selling more at stagnant prices isn't a formula to return to profitability -- at least not anytime soon.
I'm standing by my assertion that trucking companies are going to be big winners in 2013; yet J.B. Hunt Transport Services (NASDAQ:JBHT) may have exhausted those gains, and then some, well in advance.
J.B. Hunt has been shooting to new highs on the heels of strength in its intermodal trucking business, which has continued to gain market share from its peers. It's also maintained decent pricing power in an environment where rising fuel and labor costs have meant scaling back elsewhere. While I don't find the company's results to be poor -- J.B. Hunt reported a 14% climb in net income as revenue rose 11% -- it nonetheless missed EPS projections along with much of the sector. With the company now at nine times book value and facing the same pricing pressures and global slowdown fears that have plagued the sector, it's difficult to merit a forward earnings multiple of 20 on J.B. Hunt.
Instead, I'd look to park it in the meantime for one of its downtrodden peers. Arkansas Best (NASDAQ:ARCB), a trucking name I've highlighted numerous times recently, comes to mind as a suitable replacement. It offers nearly double the dividend yield of J.B. Hunt, and trades at a minuscule 39% of book value and just 10 times forward earnings. To me, the difference in upside potential between these two trucking stocks is night and day.
Researching the researchers
Lastly this week, I'm going to put aside my love for Morningstar (NASDAQ:MORN) and all of its useful financial data and show you why the back burner may be where this stock belongs.
From a personal use perspective, I like Morningstar a lot and use it for a good portion of my data and historical research if I'm looking for raw data. But just because I use a company's products doesn't mean it gets a clean pass.
From an investment management perspective, Morningstar's variable annuities business is suffering from record-low interest rates and high levels of market volatility. From a research standpoint, fewer customers are paying for services due to lower trading volumes and increased market uncertainty. All told, Morningstar's latest quarter showed stagnant revenue and an increase in profits that came mainly from reduced expenses (e.g., shelved bonuses). Reducing expenses will only take Morningstar so far, and at 25 times forward earnings, that's a pricey bill to pay for flat sales growth. In addition, reducing perks like bonuses may hurt its ability to keep talent at the company.
This week's theme is "Just because you like one, doesn't mean you like them all." I use Morningstar's data frequently, and I like the trucking sector for a rebound in 2013, but that doesn't mean I can't see what looks like a frothy valuation in both stocks relative to their peers. As for Texas Industries, it comes down to what it's going to do to boost its own pricing power for cement.
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.
Motley Fool newsletter services have recommended buying shares of Morningstar. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that never needs to be sold short.