Stocks in general have rallied this week, putting an end to the six-day bludgeoning they took last week and reinvigorating bulls. For optimists, these rallies may seem like a dream come true. For skeptics like me, they're opportunities to see whether companies trading near 52-week highs have earned their current valuations.
Keep in mind that some companies do deserve their current valuations. Both Visa
Still, other companies might deserve a kick in the pants. Here's a look at three companies that could be worth selling.
Talk about the luck of the draw if you're a shareholder of Valhi
At first I was impressed by the 46% year-over-year sales growth in the company's chemicals segment -- until I realized that almost the entirety of these gains came from a 41% jump in titanium dioxide pricing and a favorable foreign exchange rate. Sales volume for the chemicals division actually dropped 1% for the quarter if you back out the price increase and the foreign exchange benefit. While earnings results topped last year's figures, Valhi looks incredibly pricey relative to industry bellwether DuPont
Leave it on the shelf
I don't anticipate this will be a popular pick, but I recommend leaving food products company B&G Foods
Most food-related companies are dealing with gross margin contraction because of rising commodity costs, and B&G is no different. While a 10-basis-point drop in margins isn't much to write home about, it is nonetheless a perpetuation of the trend we've seen. The magnitude of B&G's earnings beats has also dropped from a 40% beat just four quarters ago to merely meeting expectations last quarter. As commodity costs rise, B&G could find margins pinched further.
OS aye, aye, aye...
When Congress passed U.S. debt-ceiling legislation in August, few thought they could come to an accord on how to eliminate more than $1 trillion from the federal budget. As promised, they delivered on their ineptitude, and now, beginning in 2013, automatic budget cuts will begin to affect the defense sector. Nothing is set in stone yet, but OSI could be in for a rude awakening as some of its government contracts dry up. As of now, OSI's backlog is strong and its balance sheet is nearly debt-free -- but that could easily change. When taking into account that OSI is nearly at a new 52-week high and is valued at an industry-premium 17 times forward earnings, I'd advise avoiding the stock here.
The theme this week was to avoid pricey but profitable companies in favor of cheaper options in the sector. Time will only tell how these companies will fare, but I feel strongly enough about them to put my CAPS points on the line in betting against them.
What's your take on these stocks? Are they sells or belles? Share your thoughts in the comments section below and consider adding Valhi, B&G Foods, and OSI Systems to your free and personalized watchlist to keep up on the latest news with each company.Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He dislikes airport screening machines a lot, not because he has something to hide, but because he has a lot of jewelry to take off. 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. Motley Fool newsletter services have recommended buying shares of Unilever and Visa. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.