Housing data remains weak, earnings season winds down, and the former head of the IMF is arrested -- you know, the same-old same-old -- yet the indexes continue to hold their ground. For optimists, these rallies may seem like a dream come true. For skeptics like me, they're opportunities to see whether companies trading near their 52-week highs have actually earned their current valuations.
Keep in mind that some companies deserve their lofty prices. Yum! Brands
A PC dinosaur
Although Dell was able to handily exceed analysts' expectations, we have to remember that those expectations could hardly have been any lower from the start. The software solutions side of Dell's business is its only saving grace. Dell's product side of its business is being picked apart by Apple's
The company pointed to better-than-anticipated margins this quarter, but I have to wonder how long it will take before this PC dinosaur falls too far behind its peers to recover. Despite about $7.7 billion in net cash, I'd consider passing on Dell at these levels. There's only so much cost cutting the company can do before investors expose the fact that Dell's revenue has flat-lined since fiscal 2008.
A case of foot-in-mouth
Shares of MDC Partners
Despite this rapid growth, MDC's shareholders have seen analysts who originally called for a profit in 2011 change their expectations to project a loss. They've also been privy to an additional $55 million debt offering from the company, which increased its borrowing to more than $340 million. Company guidance during the quarter also disappointed, with management calling for a 31% to 35% decline in year-over-year total cash flow. In light of this weakness, the company still declared a $0.14 dividend despite burning more than $30 million in cash during the past quarter. CEO Miles Nadal was quoted as saying, "What a terrific way to begin this year."
As for me, I'm left wondering if he didn't swallow his entire foot by saying that. The company's dividend payout seems unsustainable since it's losing money, and a 31%-plus drop in free cash flow is hardly something I'd call my friends bragging about. I highlighted sector rival Lamar Advertising
I reject your reality, and substitute my own
Taking a line right out of the mouth of Mythbusters star Adam Savage, I reject the reality LinkedIn
LinkedIn, which is the first true social site to bring its company public -- no disrespect to Quepasa
This would already be a ridiculous enough valuation to swallow if the company was as profitable as Facebook claims to be, but based on the company's SEC filings, its current valuation isn't even in the ballpark in relation to its actual results. In 2010, LinkedIn recorded $243 million in revenue and a full-year profit of just $15.4 million. To put this in perspective, based on LinkedIn's total outstanding shares, the company is trading at roughly 36 times sales and almost 600 times trailing-12-month earnings. Hello, 1999, right? It seems highly unlikely that LinkedIn will be able to live up to the hype that's been created by this IPO, especially considering management is predicting a year-over-year slowdown in revenue growth. I'd avoid this stock at all costs.
Whether it's an aging PC company, a fast-growing marketing agency, or a red-hot IPO, earnings matter. A trend I often look for in this weekly column are stocks with weakening or unrealistic earnings trends. All three companies this week exhibit unrealistic trends based on their current market value and could be companies worth parting ways with in the near future.
So are these stocks sells or belles? You be the judge! Share your thoughts in the comments section below and consider tracking Dell, MDC Partners, and LinkedIn, as well as your own personalized list of companies with the free and easy-to-use My Watchlist.