The broad-based S&P 500 may be about 3% from its all-time high, but that hasn't stopped nearly half of all companies in the Motley Fool CAPS database from rising to within 10% of a new 52-week high. For skeptics like me, that's an opportunity to see whether companies have earned their current valuations.
Here's a look at three companies that could be worth selling.
This year has certainly been the year of going green, with anything solar or electric-vehicle-based shooting to the moon. The latest in a serious of rocket stocks is China's Kandi Technologies (NASDAQ:KNDI), which has basically doubled in just the past two weeks following the Chinese government's approval of the company's first all-electric sedan. Given the success of Tesla Motors (NASDAQ:TSLA) in the U.S., many are suspecting that Kandi will be a surefire winner with Geely Automotive in its corner as a partner. As for me, I'm not as convinced.
The two companies are really nothing alike. Let's be clear that I firmly believe both are significantly overvalued at their current levels, but at least Tesla has the production capacity to hit a level (about 20,000 vehicles) where it can break even on an earnings basis. It's also led by Elon Musk, truly an innovative CEO, known for his ability to generate cash flow and bring new ideas to the table.
Kandi Technologies looks like nothing more than wishful thinking at this stage of the game with the company focused on producing a fleet of rental vehicles for the middle-income Chinese citizen, not the same high-end clientele that Tesla is after. Just yesterday shares soared on the announcement that it will manufacture 5,000 to 10,000 EVs initially in China. If Tesla serves as any reminder, glitches and manufacturing delays are common -- as are higher-than-forecast expenses. With EV production expected to cause expenses to soar, I wouldn't be surprised if Kandi burned through $10 million in free cash each quarter!
I fully understand the allure of EVs, but investors are a couple of years too early in buying into the concept, with the infrastructure and public understanding just not there.
Cannot compute valuation, error!
Ever since iRobot (NASDAQ:IRBT) -- a maker of robots for the government, industrial, and consumer sectors -- revamped its marketing campaign, its share price has been off to the races. If I didn't know any better, I'd say its Roomba vacuum is cleaning house of all short-sellers. However, if I've learned anything about iRobot over the years, it's that the company is completely susceptible to the normal peaks and troughs that affect the tech replacement cycle.
iRobot's most recent quarter was good and I certainly won't take anything away from its $0.12 EPS beat. But it should be understood that iRobot's beat came primarily from tighter expense controls rather than better sales and pricing. That could be a problem with a decent chunk of its revenue coming from the government. Most developed governments around the world are reducing their spending to curb high debt levels, which would bode poorly for iRobot's future orders.
The company's valuation is also a big concern. The problem with developing new technologies is that the R&D that goes into developing them, and the quickness with which they become comparatively obsolete, causes natural peaks and troughs in iRobot's bottom line. That's disconcerting, with iRobot valued at a lofty 36 times forward earnings. There's simply no amount of cleaning a Roomba can do to this valuation to make it appear attractive.
Priced for perfection
Software-as-a-service provider Demandware (NYSE:DWRE) certainly commands quite the premium valuation as enterprises transition from individual computer systems to software capable of integrating customers' information in the cloud on one Web-based platform. The beauty of such software designs is that they result in recurring revenue and regular upgrades.
The worry I have with Demandware, as I've stated in multiple instances before with SaaS companies, is that it could be years before expenses shrink enough, and organic growth is powerful enough, for the company to turn a profit. At the moment Demandware is well capitalized, with $102 million in net cash, but could burn through some of this cash as it increases its staff and R&D spending. With losses expected through 2014 and the company valued at 11 times book and 12 times sales, it's not exactly a value play by even the loosest interpretation.
The other concern, similar to iRobot's, is that government spending reductions could trickle down to enterprises, which, in turn, could quickly slow Demandware's growth rate. If Demandware has any shot of turning a profit, it'll need to pare down its spending and it'll need a pickup in enterprise spending that I just don't see happening.
This week it's all about keeping your expectations reasonable. In the case of Kandi, with its newly authorized EVs, iRobot, with its consumer-driven Roomba, and Demandware, with its single-platform software sales, the potential on paper is certainly there. However, from a valuation basis the chance of success seems pretty low over the interim.
Editor's note: A previous version of this article was mistakenly titled "3 Stocks Near 52-Week Lows Worth Buying." The Fool regrets the error.
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, and recommends, Tesla Motors . It also recommends iRobot. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.