The markets may have plunged yesterday on concerns that the Federal Reserve may soon pare back its $85 billion monthly bond-buying program, but you could hardly tell with new 52-week highs still outpacing new 52-week lows by a margin of three to two. 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. Allegiant Travel (NASDAQ:ALGT), for example, is creating cash flow hand over fist by luring in passengers with low ticket fees and then utilizing hefty optional fees such as on checked baggage, carry-on baggage, and food, which are almost pure margin plays, to add to its bottom line. The beauty of Allegiant's model is that many of these ancillary fees are purchased online or at electronic points of sale, meaning few employee costs.
Still, other companies might deserve a kick in the pants. Here's a look at three companies that could be worth selling.
Where's the beef, DexCom?
Sometimes a company's products make a lot of sense on paper, but the practical application doesn't go nearly as smoothly. This is how I'd describe medical monitoring device maker DexCom (NASDAQ:DXCM), which has an array of glucose monitoring devices to help diabetes patients better manage their disease. Make no mistake about it; the number of diabetes diagnoses in this country is rising in accord with our obesity rate. Therefore, a company like DexCom, which makes the DexCom G4 System monitor, could be a big hit, and certainly has a wide enough audience to cater to.
The key word here, though, is "could," as the practical application of DexCom's monitoring devices hasn't resulted in profits for DexCom. In the first quarter, DexCom did report robust product sale growth of 49%, but only squeaked by Wall Street's expectations with a loss of $0.16 per share. It does have solid partnerships in place, but it could be two or more years before it even turns a quarterly profit with investment in R&D taking up such a large slice of its available cash.
Another key point to note here is that competition among glucose monitoring devices is fierce. DexCom is likely going to have to spend through the nose in advertising just to differentiate its product from the rest of the field, further delaying its profitability.
Until DexCom can pull itself out of the red, I'd suggest monitoring a different company in the glucose monitoring industry.
Anything but smoothie
Fruit smoothie and juice maker Jamba (NASDAQ:JMBA) recently completed a 1-for-5 reverse split to make its share price more attractive to more risk-averse investors and Wall Street institutions. However, no amount of cosmetic changes is enough to hide the lack of progress at Jamba over the past six years.
Call it Krispy Kreme syndrome or Starbucks envy, but Jamba fell under the same spell of success that many posh drink and doughnut makers did in the mid-2000s and expanded willy-nilly. Unfortunately for Jamba, it simply assumed that having more stores would lead to big profits and everything would work itself out in the end. Needless to say, "cross your fingers economics" hasn't worked out too well for Jamba. It's closed stores and cut jobs in order to reduce costs, yet it hasn't turned an annual profit since 2005.
The more troubling aspect I find with Jamba is its expansion plans, which call for 125 new stores in California. That's right, an additional 125 stores, all clustered in one state where it already operates. Not only is it planning to add to its network of locations, but it's doing so in a market where sales are essentially flat!
If Jamba can somehow encourage more people to drink its products from a health perspective it might be able to build its brand image faster. However, Starbucks has pretty much written the book on building a brand and has courted many of the organic and natural-food seekers in the juice and drink market with numerous partnerships. Unless Jamba has something magical up its sleeve, I'm not sure it will ever push its way out of being a middle-of-the-pack kind of chain.
Home furnishings company Restoration Hardware (NYSE:RH) has certainly come a long way from where it was just a few years ago. Back then it was deep in the red, riding excess levels of inventory, and discounting everything in sight just to keep the hamster wheel turning. Now, with the company focused on a higher-end customer and better quality merchandise, Restoration Hardware is slowly trickling back into the black.
The concern I have is that this is still a very fragile housing recovery, and Restoration Hardware is hardly racking up the big bucks -- yet its share price has practically doubled since its IPO less than a year ago.
In May, the company boosted its first-quarter EPS guidance to a profit of $0.02-$0.04 from a previous expectation of breakeven results to a $0.01 per share loss. It cited lower inventory and better customer response to its product line as the impetus for its upped guidance. As for me, I'm flabbergasted that a minor bump higher in EPS and a $15 million (about 5%) boost in sales is enough to cause the stock to effectively double!
As soon as the Federal Reserve pares back its bond-buying program, you can expect mortgage rates to tick slightly higher and, I suspect, mortgage applications to dry up. Restoration Hardware's business relies on a strong housing market to drive its bottom line. With the company barely on the cusp of profitability, now is not the time to be diving headfirst into a company still in the process of completing a turnaround and trading at a whopping 34 times next year's earnings.
Yet again, history has told me pretty much everything I need to know about these three companies. With a long history of losses and an ongoing restructuring at Jamba and Restoration Hardware, the chance of these stocks seeing big bottom-line gains and maintaining them for an extended period of time seems slim to me.
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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