Corporate earnings and housing have taken center stage to lead the markets higher and push approximately 2,150 stocks within the Motley Fool CAPS Screener database to 10% or less from a new 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. Visa (NYSE:V), for instance, has been unstoppable. As a credit processor focusing increasingly on an untapped emerging market, and with no exposure to lending defaults like some of its peers, it looks poised to grow without fail for years to come.
Still, other companies might deserve a kick in the pants. Here's a look at three companies that could be worth selling.
It's about quality, not quantity
Real estate investment trusts have been garnering big interest over the past two years, and are likely to keep drawing interest for at least another two, as their high dividend yields are an attractive alternative to savings accounts and CDs yielding just a penny on the dollar in most cases. But that doesn't mean every REIT is an automatic buy.
Take National Retail Properties (NYSE:NNN), for example, a retail REIT that owns 1506 investment properties across 47 states that it leases out to medium and large-sized businesses. Rent rates have been strong recently, leading to a boost in earnings across the sector, but there's more to National Retails' earnings than meet the eye.
One of my biggest concerns with National Retail is its abysmal tenant list, consisting of Best Buy, which recently announced the closure of 50 big-box electronics stores, office-supply retailer OfficeMax, which has been closing underperforming locations, and Barnes & Noble, which is having its content pushed away from bricks-and-mortar stores and onto the Internet thanks to Amazon.com. Back in early August I proposed Realty Income (NYSE:O) as a much stronger buy due largely to its stronger tenant list, and because of its market-leading streak of 59 straight quarterly dividend increases. Not to mention that 55.5% of Realty Income's revenue is secure until at least 2023 thanks to long-term contracts. At 17.5 times forward earnings for National Retail Properties, I'm running in the other direction in spite of its 5% yield.
Five Star name, one-star potential
Five Star Quality Care (NYSE:FVE) may have the perfect name to attract first-time Motley Fool CAPS visitors, but it's not pulling a fast one over on me.
The senior-living and health-care services company has been on a tear since August following Sunrise Senior Living's announcement that it was being bought out by Health Care REIT. Just weeks prior to this news, Five Star announced that it was selling its pharmacy business to Omnicare for net cash receipts of $39.9 million.
But optimism surrounding Five Star isn't what it appears. Much of Five Star's recent income has been supplied by one-time tax benefits, legal victories, and the now finalized sales of its pharmacy business. Turning a profit this way isn't bad, but it masks the fact that growth in its continuing operations is tepid at best. The company is focusing more on individuals capable of paying with their personal wealth rather than relying on state-sponsored care, but even that has only led to an occupancy rate of 85.6%. Furthermore, the average daily rate procured per resident actually fell by 2% over the previous year. With the Affordable Care Act sure to make it difficult for senior-living facilities to rapidly boost their chargeable rates, I don't see how Five Star will mask its anemic growth rates once these one-time gains fall off the trailing-12-month results.
The never-ending onslaught of triple-levered ETFs never ceases to amaze me. Somehow, the Direxion Daily S&P 500 Bull 3X (NYSEMKT:SPXL) has escaped my wrath up until now, but I'll make sure to rectify that error with an underperform call.
As I've said on countless occasions previously, these triple-levered ETFs are a disaster waiting to happen. Between daily rebalancings and ETF fees, it basically takes perfect timing and a lot of luck to regularly make money on these portfolio vampires. Even someone who is extremely bullish on the S&P 500 would need almost a straight up move in the index just to turn a profit, as any downward move in the index would correlate to a move three times that size, in addition to the daily rebalancing adjustments, which rarely work in investors' favor. Do yourself a favor and avoid all money-sucking vehicles of triple-levered destruction offered by Direxion.
This week's theme is all about quality, not quantity. REITs and ETFs of all forms are attracting the attention of investors who are seeking better returns than those offered by CDs and savings accounts, but investors need to pay attention to the quality of these underlying REITs and ETFs if they have any hope of turning a profit.
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 Best Buy and Amazon. Motley Fool newsletter services have recommended buying shares of Visa, Amazon, and Health Care REIT. 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.