Optimism that a fiscal cliff deal will get done before Jan. 1 has put the market into general rally mode despite the numerous negative implications if we go "cliff-diving" and no deal gets done. 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. Health-service organization CIGNA (NYSE:CI), for example, looks poised to benefit from the implementation of the Affordable Care Act in 2014 and, despite being near a new 52-week high, trades at a still inexpensive eight times forward earnings.
Still, other companies might deserve a kick in the pants. Here's a look at three companies that could be worth selling.
3D, not for me!
There's no denying that 3D Systems (NYSE:DDD) is at the forefront of the next great manufacturing revolution with 3-D printing technology, or that the lowering cost of 3-D printing is going to work in its favor over the long run. However, a multitude of other factors, including its pathway to growth, its valuation, and its history, just have me wanting to avoid the stock like the plague.
In terms of growth, 3D Systems has chosen to acquire companies like it was collecting Furbys rather than to focus on growing what it's acquired organically. As noted in our analyst debate last month, 3D Systems has acquired 31 companies over just the past three years. That's fine and dandy, but I'd have to think there are going to be synergy hiccups in there somewhere!
Based on valuation, 3D Systems is trading at a blistering 33 times forward earnings, nine times sales, and seven times book value -- all at the upper end of its historical range over the past decade.
Finally, history says that we as investors are awful predictors of when a technology will take off. We overpriced the emergence of business-to-business commerce, we overhyped genome sequencing, and we definitely overhyped the importance of Chinese companies. 3D printing will eventually be a great endeavor, but we aren't there yet.
So nice, I'll say it twice!
Following much deliberation and another cup of coffee, betting against 3-D printing companies at this level seems so right that I'm going to make it a daily double by also putting in my two cents on Stratasys (NASDAQ:SSYS).
Let me start off by saying that between the two, I feel Stratasys actually offers the better long-term value as its recent purchase of Objet should net it more enterprise and specialized clientele, giving it the potential to outgrow 3D Systems organically for years down the road. Unfortunately, that still doesn't mean much when history and valuation aren't exactly on your side.
Stratasys, following its purchase of Objet, is trading at an even more aggressive valuation: 42 times forward earnings, nine times sales, and eight times book value. Even if Stratasys can maintain a long-term growth rate near 17% to 20%, it's still valued at more than two times its PEG ratio. Plus, the same arguments I made for 3D Systems, regarding overhyping and failing to understand the technology, hold true for Stratasys. All value has simply been squeezed out of this sector and I don't see how else investors are going to squeeze blood from these turnips in 2013.
Not feeling inspired
Few sectors have more riding on the line in terms of whether or not a fiscal cliff deal gets done more than human resource management companies. Job placement companies like Monster Worldwide (NYSE:MWW) -- which have thus far refuted any fiscal cliff impact -- have struggled to generate profits due to the weak employment environment and businesses simply holding pat until they know for sure which way Congress will lean with regard to taxes and spending cuts. That's why I feel resource management solutions provider Insperity (NYSE:NSP) makes a great short-selling candidate.
Insperity shares have been on fire recently as investors chased its share price higher following a $1 special dividend declaration. However, that feeling of elation may be short-lived, as I suspect the outcome of the fiscal cliff talks will be negative for Insperity no matter what the verdict. If no deal is reached, corporate spending will plunge and unemployment will assuredly rise. If a deal is reached, Insperity's results will languish from a quarter of non-commitment from businesses waiting for a verdict, and could struggle as spending is reined in to accommodate a lower-growth environment.
Over the long term, Insperity looks to have the right tools to succeed, but over the next three years, I'm certainly not willing to pay upward of 18 times forward earnings for a company dependent on strong economic growth to drive its bottom-line results.
Let's face it; it's about valuation every week, but this week, more so than the others, it's about investors expecting a miracle now when it's going to take years for these businesses to realize their true potential.