All the king's horses and all the king's men couldn't put Greece back together again. But they also couldn't keep dozens of companies from hitting new 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 current valuations. American Water Works
Still, other companies might deserve a kick in the pants. Here's a look at three companies that could be worth selling.
Beware the warehouse
I'm wondering if I should hide under a rock for this week's first sell candidate, which also happens to be a favorite of many Fools: Costco
For starters, Costco's forward earnings multiple of 22 and price-to-cash flow of 13 seem high. If you look at Costco historically, it almost always has a higher forward multiple than the S&P 500, but relative to Wal-Mart and Target, which are not exactly performing poorly, those figures look expensive to me. You'll also get consistency with Costco, whose margins have ranged tightly between 12.1% and 12.8% over the past decade, but that consistency comes with blinders for current investors. Wal-Mart and Target offer better dividend yields and lower earnings multiples. Seems like a no-brainer to me.
Limited time offer
If your friends jumped off a bridge, would you as well? Of course you wouldn’t. But taking a closer look at Limited Brands
Limited looks to be moving higher on borrowed time. If you closely examine its recent history of insider transactions, you'll see a mounting pile of sales against no purchases. In addition, many of its closest competitors have been falling by the wayside. Gap
As Limited's revenue growth slows (as analysts expect), it'll be hard to cover up the fact that it's valued at 19 times book and 10 times cash flow. Limited has been able to buck the trend so far, but its time could be up shortly.
I don't make a habit of picking on companies that have seen a rapid increase in insider selling, but this week you're going to get a double dose. In addition to Limited, shares of over-the-counter and generic-drug producer Perrigo
Perrigo has decent figures to back up its run higher. Over the next five years, the company is slated to grow at 11% annually. However, if you focus on the here and now, you'll see a company trading at a P/E ratio higher than at any time in the past four years, and a price-to-cash-flow ratio at nearly a 10-year high. I think insiders see what I see: a fully valued company.
Today we've seen that not only can we make goofy headlines out of potentially overvalued companies, we can also detect them by looking at recent insider action. While not a foolproof method of determining value, it's a starting point for further research.
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 Wal-Mart, Costco, Gap, and Limited Brands. Motley Fool newsletter services have recommended buying shares of Wal-Mart and Costco, as well as creating a diagonal call position in Wal-Mart. 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.