Despite large market moves becoming the norm, that hasn't stopped more than 450 companies from nearing 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 52-week highs have actually earned their current valuations.
Keep in mind that some companies do deserve their current valuations. Alaska Air
Still, other companies might deserve a kick in the pants. Here's a look at three companies that could be worth selling.
This stock's all fluff
What makes for a good long-term investment is a product with broad appeal and staying power. Somehow, I have a hard time throwing teddy bears into that category. The problem with the teddy bear is that it's a very cyclical product and I have little clue exactly how you would define "innovation" when it comes to making bears? This helps to sum up to this weeks' first kick to the curb: Build-A-Bear Workshop
For a bear-making operation, Build-A-Bear is trading at a hefty premium. The company, which has reported significantly wider-than-expected losses in two of its past three quarters, is likely to report flat revenue growth in 2011 and just 4% growth in 2012, according to analyst estimates. Yet Build-A-Bear is valued at 25 times forward earnings and more than 360 times trailing-12-month figures. As I see it, this stock is all fluff and simply doesn't deserve your hard-earned money.
Clinical trial blinders
I'll be the first to admit that valuing a drug which hasn't even hit the market yet is a crapshoot at best. Sometimes I look like a genius, and other times, as Pharmasset
So why bet against Halozyme, you might wonder? I refer to it as the Human Genome Sciences
Investors have had consolidation fever in the cloud-computing sector ever since SuccessFactors agreed to be purchased, but this doesn't exactly mean rational thoughts are prevailing. In fact, I'd call the recent trading action in small cap SPS Commerce
The company, while profitable and growing healthfully in the double digits, is trading at an astronomical 368 times trailing-12-month earnings and 58 times next year's estimates. Don't get me wrong, SPS is moving revenue and profits in the correct direction, but it's at nowhere near the pace it should be for the valuation bestowed upon it currently. Even more troublesome, insiders have sold more than 2.5 million shares within the past seven months, many of which represented shares that came from options grants. The company's valuation and lack of insider buying isn't inspiring any confidence in me and I'd advise leaving SPS be until its valuation comes down out of the clouds.
Whether it's a lack of innovation or a valuation bordering on insanity, you can always count on your Motley Fool perma-skeptic (i.e. me) to point them out. I'm so confident these three stocks are headed lower I'm going to start them with an underperform rating on CAPS. The question now is, would you do the same?
Share your thoughts in the comments section below and consider adding Build-A-Bear Workshop, Halozyme Therapeutics, and SPS Commerce to your free and personalized watchlist to keep up on the latest news with each company.