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In an 11th-hour, 59th-minute, and last-second deal, Congress passed a fiscal-cliff-averting bill and sent the markets soaring for a second straight session. 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. U.S. automaker General Motors (NYSE: GM ) hit a new 52-week high after the Polk research firm forecast that auto sales would increase 7% in 2013 to an annual rate of 15.3 million units. The passage of the fiscal cliff bill only furthers the notion that these figures are achievable this year.
Still, other companies might deserve a kick in the pants. Here's a look at three companies that could be worth selling.
Hide under the covers
Although most companies have a reason to smile following yesterday's fiscal cliff deal, I feel hotel and resort operators like Intercontinental Hotels Group (NYSE: IHG ) could be in for a rough year.
The fiscal cliff deal protected the majority of investment income from taxation with just minor boosts in the dividend and long-term capital gains tax to 20% as opposed to treating it as ordinary income, but a reduction in the neighborhood of $1,000 for ordinary persons due to the expiration of the payroll tax is going to bite the mid-tier vacation industry hard. For Intercontinental, this means that its higher-end Crowne Plaza should fare just fine, but its Holiday Inn brand may struggle mightily as "staycations" make a comeback in 2013.
This wouldn't be such a problem if Intercontinental didn't face such large exposure to Europe, which is going through a seemingly endless debt crisis, and if it didn't trade at such a frothy valuation already -- 18 times forward earnings and nine times book value. Consider Intercontinental anything but "suite" in 2013.
Forecast: Cloudy with a chance of short-selling
Let me preface this by saying I completely agree with optimists that Rackspace Hosting's (NYSE: RAX ) open-cloud-computing client support and options to configure the enterprise cloud experience are better than nearly the entire competition. Over the extreme long run, Rackspace looks like a genuine winner, but over the next year or three, Rackspace's growth has shown serious signs of slowing.
Net revenue and profits jumped 27% and 36%, respectively, but these figures come on the heels of just 3.5% customer growth over the previous quarter, and better than 30% revenue growth last year. Even generously taking into consideration the company's top-notch cloud platform and high growth rates, I still can't justify paying 13.5 times book value, 27 times cash flow, or 65 times forward earnings for a company that's either just met or missed Wall Street's expectations over the past three quarters. In addition, cloud-storage specialist EMC (NYSE: EMC ) has taken a cautious outlook on storage spending in 2013 primarily due to a slowdown in spending prior to the fiscal cliff resolution. I feel Rackspace shareholders should heed these visible warnings and exit stage left while they still have the opportunity.
It's time for a checkup
With fiscal cliff discussions now behind us, and the payroll tax rolling back for the majority of American taxpayers, dental equipment supplier Sirona Dental Systems (NASDAQ: SIRO ) could be in line for a drastic slowdown in orders this year as discretionary spending tightens.
Having worked in the dental industry when I was much younger, I understand precisely how fickle patients can be about their spending habits when there's the slightest change in the economy, their tax situation, or even in the materials used to manufacture something as simple as a crown. Although Sirona shocked Wall Street and me in the fourth quarter by more than doubling its income, I feel this was nothing more than an anomaly, not an actual trend.
Sirona's current CEO, Thomas Jetter, is slated to retire in February, which should add uncertainty to an already murky spending forecast, while materials ranging from gold to base metals look poised to rise thanks to strong infrastructure demand in China. As these materials rise, dental labs may be forced to cut back on their equipment orders from Sirona and its peers. At 17 times forward earnings, I'm simply not excited about Sirona's chances to head higher.
This week's theme revolves around three stocks with pricey valuations that could deflate once the mixture of higher taxes and spending cuts ripples through the economy.
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