Apparently 200-point intraday swings are becoming the norm. These volatile swings are leading not only to a run on Pepto-Bismol, but also to a surprisingly steady stream of stocks approaching their 52-week highs. 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 valuations. The thought of an online stamp company might seem ludicrous considering the proliferation of digital communication these days, but don't tell that to Stamps.com
Still, other companies might deserve a kick in the pants. Here's a look at three companies that could be worth selling.
A diamond looking rough
You would think that Diamond Foods
When fully integrated, Diamond Foods' revenue will double or even triple because of the Pringles deal -- but growth figures might smack of mediocrity when the initial euphoria of this deal wears off. Slated to see profits grow at 16.5% over the next five years and with a forward earnings multiple of 25, there's very little value left in this stock. To top it off, Diamond's piggy bank is feeling drained after its Pringles purchase, with debt-to-equity chiming in at a stratospheric 127%. Time to pass the chips ...
It's all in the electrons
Not to be confused with the latest craze from your local DJ, NVE's
In all fairness, NVE is a small company of a few dozen employees, but its growth rates don't seem to justify its current valuation. Revenue growth in its latest quarter of 13% seems healthy, but my concern stems from the company's third earnings miss in the past four quarters. To add to this, NVE is valued at nearly 10 times sales and more than four times book value. Instead of NVE, I'd suggest looking into rival Analog Devices
One of the hardest sectors to understand as a value investor is the biotechnology sector. Keeping an abstract and objective view can be hard, but it gets even harder when companies like Ligand Pharmaceuticals
The company's phase 3 results for its hepatitis C drug Promacta do show promise. It was developed in partnership with GlaxoSmithKline
This week, it's all about valuation. While all three of these companies are growing, cheaper alternatives exist in their sectors. Don't get stuck with the dead weight of a bloated stock, especially in a volatile market.
What's your take on these companies? Are they sells or belles? Tell us your thoughts in the comments section below and consider adding Diamond Foods, NVE, and Ligand Pharmaceuticals to your watchlist.
Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong. The Motley Fool owns shares of GlaxoSmithKline. Motley Fool newsletter services have recommended buying shares of GlaxoSmithKline and Procter & Gamble. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that never needs to be sold short.