The American markets may be decisively off their all-time highs, but that hasn't stopped some 1,800-plus companies within The Motley Fool CAPS database from being within 10% or less 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. Watch-and-accessories provider Movado (MOV 3.02%), for instance, reported stellar second-quarter results earlier this week, which saw sales rise 17% as operating income jumped 59%. Perhaps even more important for shareholders, Movado's board approved a 60% increase to its quarterly dividend to $0.08, from $0.05, pushing its new projected yield to 0.7%.
Still, other companies might deserve a kick in the pants. Here's a look at three companies that could be worth selling.
Unrealistic expectations
The construction industry may have found a floor with lending rates near historic lows, but I don't think that's going to be enough to save software developer Textura (NYSE: TXTR) from keeping its current market value.
On one hand, I can certainly see the value in Textura's collaboration software, which allows contractors to take care of everything from estimates and design to submittals and payment all on one platform. In Textura's third-quarter results, it delivered 65% sales growth, and saw a 235% increase in subscription-based (i.e., recurring) revenue.
However, the time for growth has come and gone with the now-imminent likelihood that the Federal Reserve is going to begin paring back its $85 billion in monthly bond purchases before the year is out. These purchases have been instrumental in keeping lending rates low, but the threat of QE3 removal earlier this year sent mortgage rates higher by better than 100-basis points from their May low. With higher mortgage rates come considerably less incentive for homebuilders to build, and enterprises to take on debt to expand their business and purchase office buildings.
That's bad news for Textura, which isn't currently profitable, and isn't expected to be profitable until 2015 or beyond, thanks to ballooning expenses. At 26 times trailing 52-week sales, and roughly 10 times book, I'd suggest passing on Textura.
Its strength is also a weakness
Similar to Textura, Altisource Portfolio Solutions (ASPS 7.14%), a software-solutions provider, has benefited from exceptionally strong mortgage activity. In Altisource's most recent quarter, the company delivered a 37% increase in service revenue -- almost entirely from its mortgage service business -- as it benefited from Ocwen Financial's purchase of the mortgage servicing rights from OneWest, and the expectation that Ocwen will continue to aggressively go after more mortgage servicing rights opportunities.
While I wouldn't discount Alitsource's growth last quarter, I also feel that, if shareholders were to expect this same rate of growth moving forward, they'd be sorely disappointed. As I discussed above, the end of QE3 is more than likely going to have a negative impact on lending rates and the mortgage industry, which has the potential to reduce Altisource's mortgage service revenue over the long run. If Altisource can emphasize its technology services, it may be able to support this valuation, but I feel that's highly unlikely, with most technology spending still tepid at best.
At its current valuation, Altisource is trading at 16 times forward earnings, but an alarming 17 times book, and close to five times trailing 12-month sales. I don't consider Altisource a strong sell candidate here, but I don't see any reason why this should be trading in triple digits, either.
Hunting for short-sale opportunities
Some of you are going to think I'm a certifiable wacko for suggesting the sale of hunting-and-camping equipment retailer Cabela's (CAB) after its phenomenal second-quarter results, but that's exactly what I'm doing!
In the second quarter, Cabela's delivered a 10.5% increase in comparable-store sales from the previous year, as EPS rose by 32%. Cabela's really got a boost from firearm sales with the potential for government regulation still looming over the sector. But, that may soon be coming to an end.
To begin with, the typical Cabela's customer is going to have his or her pocketbook constrained by higher payroll taxes and the potential for higher taxes from the implementation of the Patient Protection and Affordable Care Act. I expect this to really come to fruition come tax time next year, when sticker shock hits the typical Cabela's customer, and causes him or her to avoid heading to the store.
Another concern here is that firearm sales cannot continue at their current accelerated pace. With the potential for Congressional legislation still on the table, firearm enthusiasts have been purchasing firearms en masse. However, this is more of a temporary boost in sales based on Congressional rumor rather than an actual pick-up in demand. When heavy emotions surrounding gun control begin to fade, Cabela's could see firearms sales drop considerably.
Finally, this is a simple case of valuation. Cabela's, like Altisource, isn't particularly expensive; yet, at 17 times forward earnings, there seems to be a lot of high expectations baked into the stock's share price already. Unless the company is able to execute in a near-flawless manner, I don't see how it can maintain its current valuation.
Foolish roundup
This week's theme is all about identifying good, but overvalued, companies. For all three companies above, the business models make sense on paper, but external factors, such as rising mortgage rates and the implementation of the PPACA, give credence as to why these stocks may not be as strong as their current share price shows.
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?
