You would think a 5% correction in the market would be enough to knock many stocks down from their 52-week highs, yet nearly 1,000 are still within 6% of a new high. For optimists, these rallies may seem like a dream come true. For skeptics like me, they're opportunities to see whether companies have earned their current valuations.
Keep in mind that some companies deserve their current valuations. ICU Medical
Still, other companies might deserve a kick in the pants. Here's a look at three companies that could be worth selling.
Fright or flight?
I'm not exactly sure how Delta Air Lines
The big news buoying the stock -- outside of lower oil prices, which benefit the company by making fuel costs cheaper -- is its recent purchase of the Trainer, Pa., refinery from ConocoPhillips
Not only does Delta have zero experience in running a refinery (goodness knows it's had a hard enough time staying profitable from its fuel hedges), but its $9.6 billion in net debt completely wipes out all shareholder equity in the company. If not for the company's outlandishly high baggage fees, I'm almost certain Delta would be an unprofitable company. Considering that regional airlines are eating national carriers for lunch, I'm perfectly happy making an underperform CAPScall here.
Sell the rumor
Usually it's "Buy the rumor, sell the news," but in this case I don't even want to stick around for the news.
As for me, I'm not buying into these rumors. Instead, I'm focused on the fact that even with record quarterly consolidated cash flow and moderate RevPAR growth, the company is still valued at an expensive 172 times trailing-12-month earnings and 36 times forward earnings. Keep in mind, this is a company with nearly $1.1 billion in debt that struggled mightily during the recession and doesn't pay a dividend, yet it's commanding a similar multiple to high-growth social media companies. That valuation doesn't make sense, and neither do the rumors. I'll pass.
Far from royalty
For those of you that are movie lovers, cover your 3-D glasses, because I'm about to knock Regal Entertainment Group
Movie theater companies as a whole have a lot to be excited about given the strong results we witnessed from LionsGate's Hunger Games and the record-breaking weekend Disney's The Avengers had. But, as a friendly reminder to movie lovers and investors, a few good movies aren't nearly enough to save what seems like a slowly decaying industry.
According to data found at The-Numbers.com, a website dedicated to anything movie-related, the number of tickets sold has been on a more or less steady decline since its peak in 2002. Revenue may have risen here and there because of the effects of inflation on ticket prices, but that doesn't speak to the overall health of the industry. The increased digitization of movies online is putting a crimp in theaters' plans to get consumers back into seats. With projections calling for yet another slight decline in ticket sales in 2012, I'm going to advocate passing on Regal and its hefty $2 billion in debt.
Surprise, surprise -- high levels of debt are a warning sign; who would have guessed? Airlines, hotels and movie theaters are slow-growth businesses and should be treated with financial multiples more representative of the risks and growth patterns associated with those sectors. I'm so confident in my three calls that I plan to make a CAPScall of underperform on each one. The question is: Would you do the same?
Share your thoughts in the comments section below, and consider using the following links to add these three stocks to your free and personalized watchlist so you can keep track of the latest news on each company. And to avoid investing in stocks like these, consider getting a copy of our special report "The Motley Fool's Top Stock for 2012." In it, our chief investment officer details a play he dubbed the "Costco of Latin America." Best of all, this report is free for a limited time, so don't miss out!