It appears that not even geopolitical concerns and threats of a global growth slowdown can keep the broad-based S&P 500 from running to fresh all-time highs. 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. International telecom giant and personal portfolio holding Orange (NYSE:ORAN) saw its shares touch a fresh 52-week high earlier this week after the company surprised Wall Street with better-than-expected international growth. For the full year, Orange's sales fell 4.5%, hurt in part by unfavorable regulatory measures in France. However, Orange delivered robust sales growth of 4.4% in Spain, and 4.7% growth in Africa and the Middle East. Even more encouraging, it reached its goal of one million 4G broadband customers in France. If Orange can continue to focus on these higher-margin data plans in France while also growing its rest-of-world business, then there's a good chance it can head even higher.
Still, other companies might deserve a kick in the pants. Here's a look at three that could be worth selling.
Don't get teary-eyed
Practically the entire health care industry is on fire, with venture capital flowing in from all angles. Even big pharma has been able to participate in this rally in a big way. However, not all rallies in the big pharma space have made sense.
Take Allergan (NYSE:AGN) for example. Allergan shares have found solid footing since the company reported a 12% increase in revenue to $6.2 billion in fiscal 2013. Leading to this jump was a 43% increase in skin care revenue, a 13% jump in Botox and other neuromodulators, and a 23% rise in facial aesthetics revenue. All told, it would appear to be a pretty solid year for Allergan.
However, all is not perfectly well with Allergan. To begin with, the company purchased MAP Pharmaceuticals for just shy of $1 billion last year to get a hold of its inhaled migraine medication levadex, which, based on its clinical data, seemed to have better than a 50-50 shot to receive FDA approval. But that approval has yet to arrive due to manufacturing concerns from the FDA that have resulted in two complete response letters. As of now, Allergan's purchase has been for naught.
Allergan also suffered a big blow in its efforts to diversify its eye-care pipeline when in May of last year it reported disappointing results from its mid-stage study of DARPin. The drug had been expected to compete with Regeneron Pharmaceuticals' Eylea, but that looks like a pipe dream at present, with its future in doubt.
There's also the fact that Allergan's growth is beginning to slow, with high single-digit revenue increases expected this year and next. While not bad, that could be a bit excessive considering that Allergan is valued at 21 times forward earnings and offers very little in the way of shareholder incentives, with just a $0.20 annual dividend.
I believe there are far better pharmaceutical options available and would suggest exiting Allergan here.
The wrong type of mobile
Speaking of valuations that are getting a bit out of hand, mobile-home manufacturer Cavco Industries (NASDAQ:CVCO) has crossed my radar in a bad way.
The manufactured-home developer has surged in recent months since it acquired the remaining non-controlling interest in its subsidiaries during the second quarter, which helped push revenue up 21% and allowed its net income to nearly double in the third quarter. I certainly wouldn't take anything away from Cavco, which has benefited from record low lending rates and a cost-conscious consumer.
However, investors could be set up for some year-over-year growth disappointments once we get beyond these next three quarters following the purchase of its remaining non-controlling interest, and once the Federal Reserve is done pumping money into the economy via QE3. I've long contended that the U.S. consumer has been spoiled by historically low lending rates, and any bump higher in interest rates, which seems likely from a reduction in U.S. long-term Treasury purchases, seems as if it'll hurt housing demand in all forms.
Cavco also benefited from lower tax rates this past quarter, which have a tendency to fluctuate. The translation is that you should take its doubling in net income with a grain of salt, and expect its effective tax rate to continue to vacillate on a quarterly basis.
Simply put, at 31 times forward earnings Cavco's risk-versus-reward profile is far too skewed toward the risk side for my liking. With interest rates likely to rise and tough year-over-year comparisons around the corner, Cavco is going to need to execute perfectly if it hopes to maintain its current valuation.
A smoking-hot trade
There is perhaps no hotter trader right now than the medical marijuana bandwagon. There are 20 states in the U.S. that now allow consumers to use medical marijuana for select ailments, and even two states -- Washington and Colorado -- that have approved marijuana for recreational purposes in one's own home. But therein lies the rub: Everyone thinks it's a great idea.
Usually one of the telltale signs of a possible top is a trade that everyone is betting on; and you'd have to look pretty hard right now to find any investor who doesn't see marijuana's growth potential as explosive. That thinking has caused investors to pile into GW Pharmaceuticals (NASDAQ:GWPH), a U.K.-based biopharmaceutical company that's utilizing cannabinoids extracted from the cannabis plant to develop potential therapies for a number of ailments.
GW Pharmaceuticals currently has one product on the market in select European countries known as Sativex. Combining CBD and THC, this drug is designed to reduce the effects of spasticity in multiple sclerosis patients while minimizing the "high" often associated with smoking marijuana.
Obviously, having an approved product validates the company's platform. But can it really take off? I believe it has the potential to, but investors are pricing the company as if Sativex sales are soaring when in reality they aren't. As of the latest quarter, GW Pharma only produced $12.4 million in revenue, which would extrapolate out to around $50 million in revenue for the full-year. Yet GW Pharma is currently valued north of $1.2 billion and is still losing money.
If GW Pharma is able get Sativex approved in the U.S. or can bring more than just one product to market, then perhaps I'd be able to entertain a $1 billion valuation, but until that happens, its current sales growth simply doesn't merit this.
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Sean Williams owns shares of Orange, but has no material interest in any other 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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