Despite reeling from another disappointing jobs report and little intent from the Federal Reserve to propose further quantitative easing, about 1,500 stocks are still within 10% of 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 have earned their current valuations.
Keep in mind that some companies deserve their current valuations. Wal-Mart
Still, other companies might deserve a kick in the pants. Here's a look at three companies that could be worth selling.
Better off dead
Some companies are better off left for dead, yet here I stand, looking at Iridium Communications
Fast-forwarding to the present: Iridium is back, purchased by a group of Chinese investors for literally pennies on the dollar ($25 million to be exact). Iridium is profitable and reliant on updates to its satellite network to drive growth. One update in particular, known as AxcessPoint, allows users to use their existing mobile devices to send emails and messages. However, I'm not going to forget how poorly this company was run in the past and still see few growth opportunities in the present.
Despite counting numerous airlines as customers, including Delta Air Lines
Dis-count me out
My love affair with dollar stores is officially over. On more than one occasion, I've driven the gavel down on Dollar General based on its premium valuation and consumers' fickle spending habits. Today, it's time to add Family Dollar
Unlike Dollar General, Family Dollar does pay shareholders a dividend (currently equal to a 1.3% yield), which is a clear step up. The real reason Family Dollar joins the rest of its dollar brethren is that it, too, is priced for perfection.
Like all dollar stores, Family Dollar relies on consistent pricing strategies and aggressive marketing to bring bargain-driven consumers into its stores. However, dollar stores also market higher-end discretionary products that they need to sell in order to drive high-end margin expansion. If there's even the slightest hiccup in moving these higher-margin products, the dollar store sector will fall on hard times.
Last quarter, Family Dollar missed Wall Street's EPS estimates by $0.01, and we could be in for much of the same in the third quarter. The story that consumers are looking for bargains makes sense, but the valuation on these dollar stores flew out the window months ago.
To infinity and beyond
Every time I hear SciQuest's
To comfort the naysayers who steadfastly stand behind SciQuest's premium valuation, I will concede that it's profitable and expected to grow at 18% in fiscal 2012 and 21% next year, according to Wall Street's projections. But does that justify a trailing P/E of 157? I hardly think so.
SciQuest gets on my naughty list by providing its employees with tons of income-diluting stock-based compensation. For the year, SciQuest anticipates paying out a whopping $5.5 million in such awards, which is the reason that, despite growing sales by 15% in the first quarter, EPS actually fell! Because of these expenses and an increase in operating expenses generally in line with sales growth, SciQuest is valued at 44 times next year's earnings. It would take some serious belt tightening and operational cost controls before I'd take my underperform rating off SciQuest.
I call this week's segment "Coming back to Earth." All three companies we've looked at are priced for perfection yet exhibit notable flaws that should knock them off their perch.
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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, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
The Motley Fool owns shares of Iridium Communications and Costco. Motley Fool newsletter services have recommended buying shares of Costco and creating a bull call spread in Wal-Mart. 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.