The U.S. Producer Price Index signaled deflation in April, industrial production dipped 0.5%, and eurozone GDP clocked in at a worse-than-expected 0.2% contraction in the first quarter -- and yet the broad-based S&P 500 hit a record high yesterday. 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. U.S. solar panel producer SunPower (NASDAQ:SPWR) rallied to a new 52-week high following forecasts for the remainder of the year that exceeded the Street's estimates. SunPower's solar panels are the most efficient in the industry, and the added tariff protection put in place by the U.S. government on Chinese imports is proving crippling to China's solar sector while adding to SunPower's bottom-line profits.
Still, other companies might deserve a kick in the pants. Consider this a redemption week, as I'll be highlighting three companies I've been wrong on thus far that still look like great sell candidates.
Tesla Motors (NASDAQ:TSLA)
There isn't an emoticon that can properly sum up the dumbfounded look I have on my face at the moment. Tesla shares have tripled since the year began following the company's first-ever quarterly profit and slightly boosted annual production forecast for the Model S to 21,000 units from 20,000. CEO Elon Musk also invigorated shareholders last night by announcing that he'll be purchasing $100 million in common shares as part of a mixed cash and debt offering meant to prepay the U.S. government.
In spite of this news, Tesla has shot up my list of top short-sale candidates and now sits at the head of the class. Sporting a whopping $10 billion valuation, Tesla has only managed to hit its production targets a few times in the past two years, with multiple delays along the way -- even for the Model S. Its Model X SUV was originally supposed to debut in late 2013, but has been pushed back an entire year to 2014. Tesla has shown a history of inconsistency with regard to meeting existing production demands, so just imagine how interesting things could get when it tries to expand that production line upward from 20,000 units annually.
There's also the little fact that Tesla's peers aren't going to go quietly into the night. Ford's (NYSE:F) total car sales rose 21.2% in April as its entire line of cars and trucks demonstrated growth. Between its turbocharged EcoBoost engines, which are providing considerably better fuel economy than much of its competition, and its infiltration into China's rapidly growing auto market, it's a company that'll be tough to displace, even for Tesla.
Finally, it's all about Tesla's almost laughable valuation. Do you really want to invest in a company trading at nearly 80 times forward earnings, 10 times sales, and 57 times book that's had a history of failing to meet its own expectations? Thanks, but no thanks!
I have to eat crow and admit that Netflix's most recent quarter was another gem. Netflix easily topped analyst expectations by delivering subscriber growth of 2 million people in the U.S. and an additional 1 million overseas as it used a new deal with Disney to grow its digital library and move into more family living rooms.
It isn't the convenience that I'd argue against that makes Netflix a scary investment at these levels, but the company's valuation and the very likely prospect of growing competition and content costs that worry me.
I've long contended that Amazon.com is in far better financial shape to negotiate content deals moving forward. Netflix definitely has a "one-up" on Amazon with regard to overseas expansion, but Amazon has tie-ins well beyond just streaming content as a marketplace and cloud-based service provider that should encourage customer loyalty to the brand.
The other issue I have with Netflix is that it's still in the process of transitioning away from traditional DVD sales to its streaming business. DVDs were a much higher-margin business, so it'll take some time before margins truly stabilize.
With Netflix also dangerously close to 80 times forward earnings estimates and at 16 times book, I really don't see how you can squeeze any more blood out of this turnip.
Aegerion Pharmaceuticals (NASDAQ:AEGR)
Orphan drugs are certainly all the rage right now because they often treat rare conditions where little to no competition exists. Also, orphan drugs carry hefty price tags, often needed to recoup the expensive costs associated with researching and developing a drug.
The early approval of Aegerion's Juxtapid by the Food and Drug Administration to treat homozygous familial hypercholesterolemia certainly looked like it would give the company an early advantage over Isis Pharmaceuticals and Sanofi's Kynamro. However, Kynamro was also approved just a few short weeks late, with the duo undercutting Juxtapid in price by a significant margin. Sure, Aegerion's treatment comes in pill form while Kynamro is injected, but is this really worth a $100,000 annual difference in price? I'm inclined to think physicians and patients will say no.
There's also the fact that Isis is working with a pharmaceutical giant in Sanofi while Aegerion is going it alone with regard to commercializing Juxtapid. I'm not saying that's a bad decision on Aegerion's part necessarily; but if you twisted my arm, I'd much rather have the experience of Sanofi on my side with regard to the marketing and production aspects of a brand-new drug.
Overall, Aegerion shares have quadrupled from their lows over the past year despite the fact that it may only be break-even profitable by the end of next year. Ultimately I expect Kynamro to provide stiff competition in HoFH and feel Aegerion is priced for perfection at these levels.
This week is all about redemption. I've been dead wrong about the aforementioned three stocks previously, but the thesis for why I disliked them in the first place still stands firm. Consider this my way of "doubling down" on my underperform CAPScall in these companies.