The broad-based S&P 500 endured its first down week in a month last week, but make no mistake about it: The overwhelming sentiment is notably bullish, as rising consumer confidence figures would indicate. 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. For instance, automaker Ford (NYSE:F) is driving all over its competitors in China with its fuel-efficient EcoBoost engines while maintaining its pickup truck dominance with the F-Series in the U.S., thanks to General Motors' six-year wait in between Silverado and Sierra redesigns. With a quarterly dividend payout that doubled earlier this year, Ford looks like it'll continue to deliver for shareholders.
Still, other companies might deserve a kick in the pants. Here's a look at three companies that could be worth selling.
A rotten apple
There are few sectors that are tougher to gauge than women's apparel. If you thought teenagers change their minds on styles often, I dare you to spend a week in the shoes of an upper-management marketing team for a women's apparel retailer! It's not just the styles that are important here, but pricing is also crucial to the many working women these days who are looking for a great deal. This is why, to me, the recent run-up in women's apparel retailer New York & Company (NYSE:NWY) doesn't make sense.
I'll freely admit that New York & Company's profit surprised many on the Street, including me. But, the bottom line is the company used its accounting wand rather than its merchandise to drive these gains. In fact, same-store sales fell 2% year over year as it relied on a deferred income tax provision to boost its profit by $0.6 million. I believe that independent women who are buying New York & Co.'s merchandise are more skeptical than ever about the future of the economy and have pared back their spending in light of rising payroll taxes and previously delayed tax refunds.
Valuation is also a serious concern here. While we're seeing no revenue growth the share price has exploded higher to the point where the company is valued at 27 times forward earnings. There's simply no outfit that can mask this bad apple from the bunch, and I'd suggest leaving it on the sale rack.
Out of gas?
I can't say I'm a huge fan of many alternative-energy companies after the run some have had. However, I'm a clear-as-day pessimist when it comes to proton exchange membrane fuel cell maker Ballard Power Systems (NASDAQ:BLDP).
I think fuel cells could have a viable future. That future, though, is way down the road, when the infrastructure and lower manufacturing costs are there to support it. Ballard has been soaring on news that it'll be powering about 40 of the 50 zero-emission fuel-cell buses in Europe with its revolutionary PEM fuel cells by 2014. Some would see this as Ballard's chance to shine; I see this as a chance to tuck your tail between your legs and sell!
Ballard has demonstrated that it does one thing very well thus far: lose money. Research and development of PEM fuel cells isn't cheap, and the company has lost money in nine of the past 10 years. Furthermore, it's burned through $468 million in free cash over the past decade -- more than double its current market value. Even if they were to receive heavy subsidies, I don't believe PEM fuel cells would be a profitable venture, at least not yet. It's possibly a name worth keeping on your Watchlist, but as an investment it should run out of gas very shortly.
Get something to prop your eyelids open, because my final sell call this week comes from the always exciting paper sector. Usually some of the most boring business can be the most profitable, but that's not the case for Wausau Paper (NYSE:WPP).
Wausau, which operates out of two segments -- tissue and paper -- is in the process of selling its specialty paper business to Expera Specialty Solutions, netting Wausau $110 million. This appears to be the big reason behind the move higher, because every other metric looks as if it'd give shareholders splinters.
Wausau has now missed Wall Street's EPS estimates in two straight quarters, with Wall Street analysts projecting double-digit revenue declines this year and next year! Before this sale, Wausau also had more than $200 million in net debt, which is a bit concerning, considering how profit projections have been moving downward the previous two quarters. The company is trying to position itself for growth by focusing on the tissue market, but its restructuring is bound to hinder its results well into 2015. Simply put, there's only so much that cost-cutting and asset sales can accomplish. At nearly 22 times forward earnings, this is a stock that could give investors a third-degree paper cut if they aren't careful.
This week I let history tell the tale. None of these three companies has shown any meaningful growth over the past couple of years, and all share valuations have gone to the moon without solid reasoning.
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.
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