The markets may be down in six of the past eight trading sessions, but you wouldn't know it by looking at The Motley Fool CAPS database, where 52% of stocks are still within 10%, or less, of a new 52-week high. 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 truck engine and components manufacturer Cummins (NYSE:CMI) as a great example. Although Cummins' second-quarter results pointed to slightly weaker margins as compared to last year's, the need for domestic truck companies to have newer, fuel-efficient tractors is paramount when fuel costs continue to rise. With its foot also in the door with regard to creating natural gas-powered engines, it appears that Cummins' growth outlook is safe.
Still, other companies might deserve a kick in the pants. Here's a look at three companies that could be worth selling.
Don't look now, but it's 2010 all over again with small-cap, low-volume China-based companies suddenly all the rage with speculative investors. Today, I'm going to highlight Taomee Holdings (UNKNOWN:TAOM.DL), a children's entertainment and media company.
Like other stocks based in China, the story on paper makes a lot of sense. Increasing access to the Internet in China, and the fact that middle class wealth is growing rapidly thanks to China's rapid industrialization, is giving worlds of hope to investors in Chinese equities. For Taomee, it's already profitable, has a little more than $3 in cash per share, and trades at less than two times its book value, which would certainly make it appealing to a certain kind of investor.
But I'm not that investor. Taomee is not your typical China-based Internet provider. It's actually struggled to grow its top-line as evidenced by the 8% decline in first-quarter revenue to $9.6 million. Although paying customers rose to 1.5 million from 1.2 million in the sequential first quarter, they fell from 1.9 million in the year-ago period because it didn't introduce any new social media games. Developing social media games for an age group that's very fickle and often changes interests is both time-consuming and costly. Taomee could reduce its expenses in order to boost its bottom line, but average revenue per user and paying customers would almost certainly fall.
At 62 times forward earnings and with low-single-digit sales growth expectations, I feel Taomee's nearly 70% run in the past five weeks is grossly overstated and the share price could be in for a decline.
Wait for concrete results
Speaking of stories that make a lot of sense on paper but have just not translated into success, let's have a closer look at Pacific Biosciences of California (NASDAQ:PACB).
Starting off with the good and unique aspects of Pacific Biosciences, it offers hospitals, universities, and biotech firms its PacBio RS II Sequencing System, which utilizes newer DNA sequencing technology that can turn around results in considerably less time than its rivals. PacBio was expected to sweep onto the genetic-sequencing scene a few years ago, at a time when sequencing costs were falling through the floor and DNA sequencing's practical applications were coming into view. But that isn't even close to what actually happened.
PacBio ran into multiple problems with the accuracy of its machine, which damaged its reputation and caused its potential customers to turn to genome sequencers like Life Technologies (UNKNOWN:UNKNOWN) and Illumina. Life Technologies, for instance, introduced the Benchtop Ion Proton Sequencer, which can map the genome in less than 24-hours for a cost of $1,000, in January 2012. Because Life is already profitable and its products offer such promise given an aging U.S. population, Thermo Fisher Scientific wound up announcing a hefty $13.6 billion buyout of Life Technologies in April.
In its recently completed second quarter, PacBio installed just three of its DNA-sequencing systems, on top of the three it installed in the sequential first quarter. Net loss narrowed a bit to $0.33 per share from $0.40 in the year-ago period, but it still could be years before PacBio sees its expenses drop, and its PR blunder move far enough into the rearview mirror, before it has any chance of turning a profit. As such, I would recommend heading for the exits here at a 17-month high and wait there until PacBio's earnings results give you a reason to get back into this stock.
Gluten- and value-free
Everywhere you look these days, you'll see evidence of grocery stores and restaurants attempting to cater to healthier eating habits. Gluten-free menus and foods have slowly become a staple of today's restaurants and they're finding big success in your local grocery aisle. Boulder Brands (UNKNOWN:BDBD.DL), the company behind Smart Balance and Natural, is one such company.
Two weeks ago, Boulder delivered a 46% increase in year-over-year sales and a 149% jump in operating income in its second-quarter report as a combination of acquisitions and 11.9% organic growth helped boost results. While I wouldn't bet against gluten-free food producers over the extreme long run, I feel a company like Boulder Brands may be ahead of itself valuation-wise for the next two or three years.
For starters, let's have a look at its valuation. Next year, its revenue growth is forecast to taper off to just 14%, yet it's trading at 37 times forward earnings. That leaves us with a PEG ratio that's dangerously high at 2.64. Boulder's 11.9% organic growth also tells me a lot about the company. Certainly, it could continue to grow at this robust rate, but its acquisitions have masked what's more like low-double-digit/high-single-digit growth, which is probably not worth a forward P/E of 37.
Gluten-free products also tend to be pricier than your average grocery store product, which could become a concern if higher payroll taxes or a lack of full-time employment gets in the way of consumers' purchasing habits. I would suggest keeping your distance from Boulder until its growth rate is more indicative of its forward valuation.
This week's theme is all about waiting for the results to come to you. Some of the biggest gains do indeed come from seeing an industry shift before it occurs and positioning yourself in that trade well in advance. However, Taomee and PacBio have decisively shown that waiting on the sidelines for top-line growth is the more prudent course of action, while, with Boulder Brands, simply waiting for a lower forward valuation or higher organic growth rate would be the wise move.