Protests in Greece and Spain dipped the market, but hardly enough to make a sizable difference in the vast amounts of stocks trading near a 52-week high. For skeptics like me, that's an opportunity to see whether companies have earned their current valuations.
Keep in mind that some companies deserve their current valuations. Regional bank Hudson City Bancorp
Still, other companies might deserve a kick in the pants. Here's a look at three companies that could be worth selling.
A daily double
We're not on Jeopardy!, but Alex, I'm going to start us off with a daily double on Comcast
Comcast shares are nearing an all-time high, having taken advantage of miscues from DISH Network, which is currently in a legal battle with AMC Networks over a failed programming deal. Comcast has been aggressively adding high-speed subscribers and pushing its high-margin digital TV platforms with moderate success.
Why I'm negative on Comcast here has to do with its valuation relative to its peers, the likelihood that its peers will adjust to regain lost market share, and consumers' overall opinion of the business. I'm fully aware that AT&T and Verizon offer significantly more diversified products than Comcast, but I'm simply unwilling to pay 16 times forward earnings for a company that'll likely grow in the low-to-mid single digits organically. Second, I don't see how DISH, DIRECTV, or even Internet streaming companies are going to allow Comcast to dominate the pay-for-TV market. DISH's unique and short-term problems are really giving Comcast its biggest boost at the moment. Finally, I don't think there's a more universally disliked company by consumers than Comcast. Word of mouth can be your friend or your enemy, and I just don't see Comcast outperforming from here with such negative sentiment surrounding its service.
Tongue and chic
I recall reading, near the end of August, an Associated Press article on a key metric rising for retailer American Apparel
American Apparel's CEO, Dov Charney, noted strength across all major market segments, but also pointed to the need for tighter inventory management and store renovations that are needed to drive sales. I'd like to counter with the fact that American Apparel has never done a particularly good job at managing its inventory levels and has relied on heavy discounting to move its merchandise. In addition, consumer spending is falling, which is hurting some of its closest competitors, like Aeropostale. Finally, how American Apparel expects to renovate its stores and complete the construction of its distribution center with a current cash balance of less than $8 million is beyond me.
I don't make such predictions lightly, but as it's been cash flow positive in only one of the past five years, it seems to me that American Apparel's prospects are sinking quickly.
Growth with an asterisk
"When in doubt, buy them out" should be the new motto at Roper Industries
Roper has already made four acquisitions in 2012, most recently purchasing privately held Sunquest Information Systems for $1.415 billion. The acquisition, according to Roper, should add $140 million in EBITDA next year. Now let me share why I think now is a good time to hit the exits.
Let's start with Roper's second-quarter results, which demonstrated just a 3.5% increase in revenue. Of that increase, organic growth (stripped of acquisitions) was a meager 3%. Considering that Roper is valued at 19 times forward earnings, that means investors are willing to pay more than six times the organic growth rate for Roper's business! To me, that's a very rich valuation. Finally, while the company does have $519 million in cash, and a $1.5 billion credit facility, at some point it's going to need to show Wall Street it can be more than just a company that acquires things. I'm not impressed to say the least.
This week's theme is about pointing out growth with an asterisk. Comcast has shown some genuine strength, but I attribute that mainly to DISH Network's shortcomings. Roper and American Apparel, on the other hand, have little organic growth, or basically none at all, in American Apparel's case.
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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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