The S&P 500's six-day winning streak finally came to a close earlier this week, but that hasn't stopped 49% of all stocks in The Motley Fool CAPS database from inching to 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 valuations. Take chipmaker Intel (NASDAQ:INTC) as a great example. Recently, on the heels of better-than-expected PC demand by businesses, Intel boosted its second-quarter revenue guidance to a new range of $13.4 billion-$14 billion from prior guidance of $12.5 billion-$13.5 billion.Given that Intel is the dominant force in processing chips, it's evident that its PC-related cash flow will be strong enough for the company to maintain or grow its dividend and fund its mobile and cloud R&D projects.
Still, other companies might deserve a kick in the pants. Here's a look at three that could be worth selling.
All that shines isn't precious
As a contrarian investor who often has numerous downside hedges in place, I've come to appreciate gold and gold miners over the years. During economic downturns, you'll see so-called "gold bugs" everywhere, but long-term gold-supporters like myself are few and far between. However, not all that shines within the gold sector is investment-worthy.
For instance, there's Agnico Eagle Mines (NYSE:AEM). Agnico Eagle has enjoyed a healthy run higher over the last couple of months as commercial production began at its Goldex and La India mines and it delivered a big surge in production from its Meadowbank mine. When I examined the 12 largest gold miners based on a number of statistics back in April, none exhibited stronger production growth than Agnico Eagle. Shares got an even bigger boost when the company announced in the first quarter that 2014 production should exceed expectations while costs should come in below expectations. All told, this is good news for Agnico Eagle, and I certainly wouldn't take that away from its shareholders.
However, Agnico Eagle also has a number of questions left to answer that I believe bring its current valuation into question. Perhaps nothing stands out more than the recent acquisition of Canada's Osisko Mining in collaboration with Yamana Gold (NYSE:AUY). While the deal itself should help lower Agnico-Eagle's long-term all-in sustaining costs and will help provide Agnico Eagle with cash flow it can use to help pay down its debts, the joint-venture bid with Yamana came after a bidding war with Goldcorp. The end result was a $3.5 billion winning offer that I believe overvalued Osisko in the near term and places the onus for quick results squarely on Agnico Eagle. Again, this could be a long-term win for both Agnico Eagle and Yamana, the leader in low-cost gold mining, but I'm not sold on it over the next few years.
Also, we're looking at a company valued at 33 times forward earnings in an environment where gold prices are stagnant. In order for Agnico Eagle to succeed with a forward P/E this high I'd need to see its cash costs remain sustainably in the $400s per ounce. According to its latest quarterly report, the company anticipates cash costs of $670 per ounce to $690 per ounce. in 2014, which just doesn't cut it.
Agnico Eagle has a number of catalysts that could take it higher, but unless gold prices zoom past $1,400 per ounce on a sustained basis, I see no reason to chase its shares higher here.
Time to look in the mirror
Just as we saw with Agnico Eagle, not all companies are inherently bad; they often are just mispriced because of uninformed or emotional traders. I suspect that could be the reason data analytics company comScore (NASDAQ:SCOR), which has seen its share price rise by better than 50% over the trailing 52-week period, makes my naughty list this week.
On one hand, comScore's role in improving enterprise potential is without question. The company's analytic platforms allow media and advertising companies to properly understand their focus audience, including demographics, attitudes, lifestyles, and a handful of other characteristics. A broadcasting company's capacity to understand its audience can mean hefty pricing power with advertisers. For an advertiser, a better understanding of its audience could mean improved follow-through in product and service sales. Long story short, businesses need comScore's software.
How willing businesses are to admit that they need this software is another case entirely. ComScore's current growth rate of 15% seems pretty impressive, but less so when you compare that to the fact that it's only marginally profitable and trading for more than 100 times forward earnings. Even giving comScore the benefit of the doubt, it still won't reach a fairly aggressive PEG ratio of two until 2017!
Unless consumer spending radically picks up in the U.S., it does not seem possible that comScore will improve its bottom line quickly enough to match its share price growth. My suggestion would be to stick to the sidelines and wait for a substantial sell-off before considering comScore as a viable long-term investment.
We're getting near that point of the bull market where a good portion of IPOs making their debut are causing me to cringe in horror. Few new issues look to be scarier than Aspen Aerogels (NYSE:ASPN), which made its market debut two weeks ago.
Aspen Aerogels offers an intriguing story on paper. The company manufactures high-performance aerogel insulation used by oil companies in offshore pipelines and by the aerospace and defense industries. Its products can also be used in ambient-temperature walls for commercial and residential builds. In other words, it has the potential to be a high-margin type of business if the product catches on quickly.
Aspen's product has been growing, but not as fast as I'd like to see with a valuation approaching $250 million. The company brought in $11.4 million in revenue in 2006, and that figure grew to $86.1 million in 2013. But during that time it has produced nothing but one operating loss after another. I personally don't see how Aspen can reduce its product costs to a point where it turns a sustainable profit once you factor in growing operating expenses tied to a larger sales staff and research department.
Some of you might cite its profit in 2013 as a reason why the company deserves its healthy premium, but I'd instead point to the fact that simple accounting magic (i.e., the retirement of convertible preferred stock) is the only reason it turned a profit. Without that one-time benefit, Aspen's loss would have ballooned to nearly $49 million.
Making matters even worse, Aspen's debt soared from just $0.6 million at the end of 2009 to $138.6 million by the end of 2013. The proceeds from its IPO will help fund its next production facility, but I don't expect those funds to have any material impact on its growing debt.
Lastly, Aspen's 10 largest customers account for a whopping 65% of its business. There's no guarantee Aspen will be able to keep customers loyal, especially if it runs into any snafus while opening a new production facility. If just one of these customers walks it could mean big trouble for Aspen shareholders. This is the kind of stock I refer to as an "IP no!"
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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