Spain's lending rates, Greece's growing debt woes, and disappointing earnings reports from UPS and Apple really took a toll on the market this past week. Still, that hasn't stopped more than 1,000 stocks from trading within 10% of a 52-week high. 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. Two Harbors Investment
Still, other companies might deserve a kick in the pants. Here's a look at three companies that could be worth selling.
To InfiniBand, and beyond!
Let me start off by giving a round of kudos to Mellanox Technologies
Mellanox, whose InfiniBand line of products provides the interconnecting switches between servers and storage systems, has benefitted from the growth of cloud-computing and a boom in enterprise data needs. In its latest quarter, Mellanox recorded revenue growth of 111% over the previous year with EPS smashing estimates by $0.25.
However, after such a run, I have to wonder that at 22 times forward earnings and nearly 70 times trailing, are the results more than baked into the price? In addition to the valuation concerns of trading at 10 times sales and seven times book value, Mellanox also relies on Hewlett-Packard
A false glimmer of hope
Another week, another homebuilder to run away from. This week, it's U.S. homebuilding giant D.R. Horton
According to the Federal Housing Finance Agency, housing prices have trickled higher in four straight months, with Zillow confirming that home prices rose in the second-quarter, year over year, for the first time since 2007. With so many points of optimism, you're probably just assuming I'm being far too pessimistic about the sector. You may indeed be partly right about that, but I'm still having a hard time grasping two key points about this rebound in housing.
For one, I still don't get how homebuilders can continue to build with literally millions of homes either already owned by banks or currently in the foreclosure or pre-foreclosure process. I feel the sheer volume of foreclosed properties waiting to enter the market is going to have a negative impact on prices for years to come. Also, it's taken 30-year mortgage rates to drop below 3.75% to even have the slightest boost in homebuying activity. As soon as lending rates begin rising again, the spoiled American homeowner is going to boycott buying a home at higher rates and send the housing industry into an even nastier tailspin.
Given my objections, I don't see how the United States' largest homebuilder, D.R. Horton would make a good long-term investment.
Insulin for the win?
You would think that combining innovative medical technologies with insulin needed by a growing number of diabetes patients would be a winning formula. Yet, that's not quite the case with Insulet
Insulet has developed a tubeless insulin pump that has rapidly grown sales but has yet to make the company profitable. In Insulet's latest quarter, the company reported a wider operating loss than the previous year of $10.9 million as operating expenses rose 50%. On top of Insulet's widening losses, as it ramps up production of its new products, it will also need to deal with the medical device excise tax of 2.3% that was passed with the approval of the Patient Protection and Affordable Care Act. The device tax provides yet another hurdle for Insulet to become a profitable medical device company.
Until Insulet becomes sustainably profitable and can keep its expenses under control, I'd avoid the company.
This week it's all about keeping your optimism under control. Whether it's the housing sector, a cloud-computing play, or new medical technology, until macroeconomic trends improve these three companies have a lot to prove to make me a true believer.
Share your thoughts in the comments section below, 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!
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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.
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