A raging battle between bullish housing numbers and concerns over the looming fiscal cliff haven't been enough to stymie hundreds of companies from climbing within reaching 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. Gilead Sciences (Nasdaq: GILD ) , for instance, has been in full rally mode following news that its lead hepatitis-C compound, sofosbuvir (previously GS-7977), when combined with GS-5885 and an antiviral ribavirin, completely eliminated all detectable levels of the virus just four weeks after a 12-week dosing regimen in late-stage trials. Sofosbuvir looks well on its way to becoming a blockbuster hepatitis-C treatment.
Still, other companies might deserve a kick in the pants. Here's a look at three companies that could be worth selling.
Pick up the slag
You would think that aluminum investors would take their cue from Alcoa (NYSE: AA ) , which continues to be hampered by a slowdown in Chinese demand as well as weak aluminum pricing, as a reason to avoid aluminum producers altogether. Yet, check the list of companies nearing a new 52-week high and you'll see California-based Kaiser Aluminum (Nasdaq: KALU ) .
Kaiser has crushed Wall Street's EPS estimates in three straight quarters and has managed to find ways to grow that Alcoa hasn't -- mainly through strong automotive and aerospace industry sales. However, that may all be coming to a grinding halt as the looming fiscal cliff threatens to wipe out hundreds of billions in spending within the aerospace sector, and auto sales have been gradually slowing to a more moderate growth pace across the board. Considering that analysts are expecting very minimal year-over-year EPS growth going into next year, and aluminum prices are actually down a bit more than 5% in just the trailing two-month period, I'd suggest passing up Kaiser Aluminum for better pastures.
Cool doesn't always translate to a winner
Just because something sounds "cool" doesn't mean it's necessarily a winner. Take Insmed (Nasdaq: INSM ) for example, which debuted on the Nasdaq in June 2000 and has eroded 95% of shareholders' investment since then. Over the trailing 10-year period, Insmed has burned through about $216 million in cash and still doesn't have an drug approved by the Food and Drug Administration to show for it.
Insmed currently has multiple clinical trials being run for its inhalable liposomal amikacin, known as Arikace, which is being targeted at serious lung infections, including cystic fibrosis. Testing of the drug in mid-stage trials suggests Arikace was well-tolerated and more effective than the placebo; however, a clinical trial halt (which is over now) by the FDA in early August of last year over safety concerns in tested animals reminded investors just how fragile and uncertain Arikace's chances of approval still are. Even with ample cash in hand, I wouldn't put yet another secondary offering over on Insmed, nor would I assume that an approval would put Insmed in the green considering all it's invested in Arikace's development, and the costs of acquiring the experimental treatment by purchasing Transave. Conceptually, the treatment sounds fantastic, but I'm not sold on Insmed at $8.
Still waiting for delivery
Not to repeat what I just said about Insmed, but sometimes you just need to stop hearing the rhetoric and see the actual results. With regard to Conceptus (Nasdaq: CPTS ) , a manufacturer of minimally invasive reproductive devices, profits are finally starting to roll in, but they are far too minimal to support its current valuation.
Conceptus' most recent quarter highlighted two reasons why the stock has been taking off recently. First, Hologic's (Nasdaq: HOLX ) Adiana exited the permanent birth control market, taking out a direct competitor. Second, many pundits feel that the Affordable Care Act will support unanimous insurance approval of Conceptus' Essure procedure -- by far its biggest revenue generator.
As for me, I can't help but get stuck on the multitude of negatives. For instance, Conceptus' reliance on European sales could become a pronounced long-term drag as sovereign debt issues weigh on spending. Also, let's not forget that medical device makers like Conceptus are going to be exposed to the medical device excise tax beginning in 2013, which will take a 2.3% tax off total revenue to help fund an expansion of Medicaid under the ACA. Finally, where's the bottom line profit? Conceptus is trading at a ridiculous 113 times forward earnings, yet it's revenue growth rate is only slated to be around 11% this year and 14% next year, according to Yahoo! Finance. Giving it the benefit of the doubt, that's a PEG ratio of eight! Thanks, but no thanks!
This week's theme is all about keeping your emotions out of investing. There are plenty of novel treatments being offered in Insmed and Conceptus, but the valuations simply don't make sense given the data we have. Similarly, we've seen the warning signs from Alcoa and automakers, yet Kaiser shareholders haven't gotten the hint; it's only a matter of time, I figure.
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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