The broad-based S&P 500 may have suffered its first losing week in seemingly forever last week, but that hasn't stopped more than 45% of all stocks in the Motley Fool CAPS database from trading at or within 10% of a fresh 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 valuations. Take integrated oil and gas giant Chevron (NYSE:CVX) as a great example. Although Chevron's last couple of earnings reports have been hit by refining margin weakness, a recent surge in oil prices tied to instability in Iraq could mean bigger profits for Chevron since its higher-margin drilling and midstream business would more than offset any persistent weakness in its refining operations. With a 27-year streak of dividend increases under its belt and a minuscule forward P/E of 11 considering its vast global assets, I wouldn't suggest any current shareholders part ways with Chevron.
Still, other companies might deserve a kick in the pants. Here's a look at three that could be worth selling.
I admit to being a contrarian investor who often flocks to the markets' most unloved sectors. Perhaps no sector has drawn more ire in recent years than miners, which have endured substantial declines in metal prices as well as a surge in labor costs. This combination has caused pretty much every mining company to rethink how it plans to expand its operations and instead focus on controlling costs.
But even I find the valuation of a handful of miners, even now, to be way beyond reason. One in particular that I would suggest should be sold at its current price is MAG Silver (NYSEMKT:MVG).
MAG Silver is a development-stage miner focused on producing silver (which you may have surmised from its name), as well as lead, zinc, and a number of other byproducts. Primarily, MAG is focused on enhancing its Juanicipio property, which it owns 44% of through a joint venture with Fresnillo (which happens to own the remaining 56% share).
In late May MAG announced encouraging mineral resource estimates from the Juanicipio property based on 40 infill holes drilled over the prior two years. According to the company's press release, the Bonanza Grade Silver Zone indicated silver resources totaling 160 million ounces, or 71 million based on MAG's 44% stake, as well as 48 million ounces of inferred silver resources, or 21 million based on its 44% stake. In a perfect world that had no costs and in which inferred resources were proven this would equate to approximately $1.8 billion in silver, so you can see why MAG shares vaulted higher by 30% over the past couple of weeks.
But the truth of the matter is that silver prices have hardly budged over the past couple of months and MAG is still years away from turning its exploration into a tangible reality. Based on MAG's own estimates, its Juanicipio property isn't expected to yield any production until 2017! That's right; investors are just supposed to assume that over the next three years everything is going to go according to plan with regard to mining costs and silver prices all while MAG continues to burn through its remaining cash on hand! Not to mention that MAG has completely moved away from its Cinco de Mayo property in an effort to conserve cash and push the importance of its Juanicipio property.
With the prospect of profitability still four or five years out I see no reason for investors to pay north of $500 million for MAG when you can just as easily find profitable silver miners with a considerably more attractive valuation.
Fantasyland called: it wants its stock back!
Speaking of developmental-stage companies, next up on the list is the cryptic Accelerate Diagnostics (NASDAQ:AXDX).
I haven't heard hide nor hair of this company for years, yet its shares have skyrocketed from roughly $1 at the beginning of 2012 to nearly $30 this week. Normally it's difficult for companies that gain 2,500% in a matter or two and a half years to fly under my radar, especially if they're in my area of expertise, the health care sector.
The allure of Accelerate Diagnostics is the company's BACcel system, which is a rapid diagnostic platform designed to help physicians quickly identify life-threatening infectious diseases. The purpose of its platform is to save lives from being lost unnecessarily due to slow pathogen detection, and since nothing similar exists at the moment investors are clearly very excited about its potential.
But I have quite a few problems with Accelerate. First, it's worth more than $1.2 billion and is entirely clinical. In its latest quarterly results Accelerate reported just $14,000 in royalty revenue despite its total expenses ballooning from $2.6 million to $5.8 million year over year. Furthermore, the company's weighted average shares outstanding jumped to 41.8 million from 29.1 million because the company funds its operations through share offerings. In other words, if you own Accelerate Diagnostics share dilution is almost a guarantee with no substantial recurring revenue currently on the table.
Another aspect I find particularly odd is that I needed to go directly to the company's investor relations and SEC filing page to locate its latest quarterly results. I can't remember the last time I've struggled so much to locate data on the financial performance of a company. With the exception of its somewhat regular share offerings it's practically impossible to find press releases from Accelerate regarding the advancement of its BACcel system or the financial status of the company. What I can say is that through its most recent quarter it has accumulated a deficit of close to $40 million and probably only has enough cash and investments to sustain its operations, by my estimates, for another 20 to 24 months.
Given a monstrous valuation and no sign of profits anytime soon, I'd suggest bailing on Accelerate Diagnostics as quickly as possible.
For this last pick we'll take a break from wholly developmental-stage companies and turn our attention to a mid-cap stock that could soon find itself weighed down by cement.
The final company you may want to consider parting ways with this week is Martin Marietta Materials (NYSE:MLM), a provider of aggregates to the construction sector as well as paving asphalt products and mixed concrete.
As you might have imagined, a rebound in the housing sector on the heels of record-low lending rates and a resurgence in industrial production has fueled higher home prices and pushed enterprise construction demand higher. The end result has been high single-digit to low double-digit growth expectations for Martin Marietta as well as steady pricing power.
Unlike the previous two companies, Martin Marietta has a business model that clearly works. However, its current valuation currently stands at 24 times forward earnings with a PEG ratio above four.
In addition, Martin Marietta agreed in January to purchase aggregates company Texas Industries (NYSE:TXI) for $2 billion in an all-stock deal. Texas Industries is a company I've repeatedly "picked on" due to its consistent free cash outflow and inability to stay healthfully profitable since the recession. A combination of these two companies, per Martin Marietta, could create $70 million in pretax synergies by 2017, and is expected to be immediately accretive to earnings. My question, though, is what effect this will have on Martin Marietta's cash flow and how easy will it be to incorporate Texas Industries' operations into the fold. Until we know the answer to these questions, I'm not certain it's prudent for investors to bid Martin Marietta shares higher than they are now.
Lastly, I don't anticipate that lending rates will stay as low as they are for too much longer. The end of QE3 and a general return of lending rates to their historic norms over the long run could cripple residential housing market growth and markedly slow enterprise construction, which, in turn, could hurt cement prices.
Martin Marietta has a solid business model, but it's intricately tied to the cyclical nature of the economy. I believe the time to buy this company has come and gone and would suggest parting ways before it weighs down your portfolio.
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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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