With 54% of the stocks in the Motley Fool CAPS Screener database within 10% or less of a new 52-week high, I'm beginning to think that not even the kitchen sink can stop this rally. 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. Take Goodyear Tire & Rubber (NASDAQ:GT) as a perfect example. Goodyear pumped up profits in the second quarter thanks to a 42% boost in income in Latin America and easily soared past the Street's EPS forecast by $0.28 per share. Furthermore, Goodyear guided toward the high end of its previous operating income forecast, signaling that auto sales may help improve weak tire volumes. With rubber prices still well under control, Goodyear is a cash flow juggernaut that cannot be counted out, even at a 52-week high.
Still, other companies might deserve a kick in the pants. Here's a look at three companies that could be worth selling.
My fellow Fools have been all over this wet noodle, but I haven't had my say on Noodles & Co. (NASDAQ:NDLS) just yet. Debuting just weeks ago, Noodles & Co., a fast-food chain of close to 350 restaurants that serves up (you guessed it!) pasta dishes as well as sandwiches, soups, and salads, more than doubled on the day of its IPO, with shares soaring an additional 20% since then. Just what are they putting in the pasta at Noodles & Co.? Nothing tangible for investors, I'd say!
I'm sort of at a loss to begin because there are so many issues to tackle. How about a lack of geographical diversity, for one thing? Noodles & Co. has restaurants in 25 of 50 states (and the District of Columbia), but 74% of its restaurants are piled into just nine states! If you look at their geographic breakdown in their S-1 prospectus (page 69 for those interested), it's as if they purposely tried to cram restaurants into states that offer the worst winter weather. Even Panera Bread (NASDAQ:PNRA) occasionally finds its sales at the mercy of Mother Nature. With winter so bleak in many of the states Noodles & Co. operates in, I can't foresee many years of exceptional growth ahead.
That leads me to my next point: a lack of same-store sales growth. In the same prospectus, Noodles & Co. points out how it's grown the number of new stores by an average of 16% per year since 2004. However, revenue has jumped by just 15.2% since 2008. That would basically imply that adding stores is the only reason sales are improving, and that average revenue from existing stores is failing to keep up with expansion.
With projections this year of roughly $353 million in revenue and about 350 restaurants, Noodles & Co. is bringing in an average of just above $1 million per store but raked in less than $14,000 in average profit per store over a trailing-12-month period. By contrast, Panera, with its 1,708 stores as of the end of the second quarter, is more geographically diverse, is forecast to bring in an average of $1.41 million per store this year, and generated an average of nearly $110,000 in profit per store over the trailing-12-month period.
At nearly 80 times next year's projected profits, this is one IPO to leave on the stove as it's clearly too hot the handle.
A smart play... in about five years
You know how I'm always saying that many investors are really astute about analyzing and discovering the next big thing but they're absolutely terrible at timing that trend? Well, let me introduce you to NeoPhotonics (NYSE:NPTN), a company that sounds like it came straight out of a Star Trek movie and makes its living by manufacturing high-speed optoelectronic modules and photonic integrated circuitry for rapid data transmission.
Ultimately, NeoPhotonics may make quite a name for itself when 5G wireless technology, or even 4G LTE, becomes more superfluous in the U.S. and around the world. NeoPhotonics' products are geared toward enterprises to help improve transmission speeds and, based on the fact that the company's 100G products grew 41% quarter over quarter, businesses seem to be taking to its products with open arms.
However, those products aren't likely to see sales ramp up until well into 2015 or 2016, meaning profitability is still years off by my estimations. In addition, the tech replacement cycle, whereby wireless infrastructure is upgraded beginning with big investments from wireless service providers, will likely end sometime in 2014. To that end, NeoPhotonics' shareholders are probably seeing the best environment for their company's 100G products that they will see for the next three to five years... and it's still not profitable.
I'd suggest keeping this company on your Watchlist but trading it in for something that you'd be likely to see a more immediate and longer-term impact from, like JDS Uniphase in the fiber-optics sector.
Quite the gamble
There are no "sure things" when it comes to investing, but some stocks just look like more of a gamble than others. That's the way I feel about Scientific Games (NASDAQ:SGMS), a gaming solutions company to the lottery and gaming industries.
The most recent quarterly report for Scientific Games highlighted a few bright spots, including its pending acquisition of WMS Industries, which will boost its existing lottery and gaming foothold, as well as being selected as the primary lottery vendor by the state of Delaware.
But for what few victories Scientific Games have achieved, there are also many disappointments along the way. For instance, U.S. lottery systems' customer retail sales dropped by 15% from the previous quarter, which the company blamed on a record Mega Millions jackpot in 2012. To that end, this shows just how little control Scientific Games has over the gambling habits of its customers. Service revenue on the gaming side of its business also declined, leading to an overall sales slump of 5% in the first quarter.
The other aspect that we have to take into account here is that global economic strength determines how willing consumers will be to gamble their money away. Aside from a select few individuals, consumers are generally spending less with the payroll tax holiday now removed in the U.S. and austerity measures instituted throughout much of Europe. Without a huge push into Latin America and South America, Scientific Games' forward P/E of 48 is looking like it could hit tilt long before it hits the jackpot.
Every once in a while, timing can be important, and that's what today's theme is all about. All three companies have a shot at being successful over the long run, but this isn't the time or the place for investing in any of these three. Until Noodles & Co. gets more geographically diverse, NeoPhotonics jumps on the 5G upgrade cycle, and Scientific Games has had some time to digest its WMS purchase, I'd lay off all three stocks.
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 recommends and owns shares of Panera Bread. 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.