The broad-based S&P 500 may be in the grips of its steepest downtrend in more than five weeks, but that hasn't stopped nearly 45% of companies within The Motley Fool's CAPS database from pushing within 10% of new 52-week highs. 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. Discount variety store Dollar General (NYSE:DG) is one such company. It's benefiting from a highly selective and cost-conscious consumer at the moment. In its most recent quarter it delivered a 4.4% increase in same-store sales and a 10.5% jump in overall revenue -- a far better performance than practically all other retailers at the moment. In addition to reporting solid results, Dollar General also boosted its share repurchase program by $1 billion. At just 16 times forward earnings, this valuation could still have room to grow.
Still, other companies might deserve a kick in the pants. Here's a look at three that could be worth selling.
Take a secondary look
It was that long ago that we were talking about regenerative biomaterials and bio-implant company MiMedx Group (NASDAQ:MDXG) as one of the biggest flops of the year. In early September, MiMedx, whose products are used to treat inflammation and help wounds heal, collapsed as much as 70% in a single session following word from the Food and Drug Administration via an untitled letter that it considered the company's micronization process a sticking point that should necessitate regulation.
However, shares have since rebounded, with MiMedx responding to the FDA's requests earlier this month with a proposal to go through the investigational new drug and biologics license application process with the expectation that its products could remain on the market during that process. The FDA doesn't have to accept this proposal, but shareholders seem to believe that the FDA will, given that the stock hit a fresh 52-week high yesterday.
As for me, I'm not sold on this rally. What really stood out was the fresh 5 million share dilutive offering which was announced yesterday at more than $1 below its closing price. Furthermore, what I find to be a bit of a head-scratcher is that Canaccord Genuity underwrote the secondary offering, yet just a week prior adjusted its price target on MiMedx higher. I'm not accusing anyone of anything fishy here, but the timing of the price target hike and share offering are somewhat questionable.
My other concern is the increased costs and/or potential delays associated with MiMedx taking its products through the IND and BLA process. Although the company is eligible for select reimbursements for its clinical trials, the added costs upfront will likely thwart any chance it has of being profitable next year, in my opinion. I would certainly suggest utilizing this recent new 52-week high as a chance to hit the exits.
The unicorn has left the building
It's official: The biotech IPO craze has hit a new low... or should I say high.
Although it's been almost a year since clinical-stage biotechnology company Prothena (NASDAQ:PRTA) came to market, the share price has rocketed higher by more than 400% due to a mixture of biotech euphoria throughout the sector and a deal announced yesterday with Roche (NASDAQOTH:RHHBY). Under the terms of the deal, Roche will pay Prothena $45 million upfront in order to gain the licensing rights to currently preclinical Parkinson's disease drug PRX002. Prothena is eligible to earn up to $555 million in additional milestone payments as well.
While I wouldn't dare deny bulls their moment in the sun, I want to know exactly what unicorn they've been riding higher. Prothena sports just three drugs in its pipeline: NEOD011, a phase 1 treatment for AL and AA amyloidosis; PRX002, a preclinical treatment for Parkinson's disease; and PRX003, a preclinical inflammatory disease and metastatic cancer treatment. That's a $606 million market valuation for a company with only one drug in clinical trials and zero recurring revenue.
In addition, while I would love to see Prothena's Parkinson's treatment work, biopharmaceutical companies have had a very low success rate with the disease. Even having Roche in your corner is no guarantee of success.
Prothena is certainly sitting pretty with regard to its cash position thanks to its Roche deal and a 5.9 million-share offering in October, but there are no near-term catalysts to support this frothy valuation that I can see.
I certainly won't fault optimists for rallying behind Twitter after seeing how successful Facebook has become with its push into mobile (49% of Facebook's advertising revenue came from mobile last quarter). LinkedIn has also made a successful move into the black after years of losses.
Twitter, though, is facing a tough uphill battle in a highly competitive social-media space, and it's already beginning to see its steep growth rate declining. As AllThingsD pointed out based on Twitter's S-1 filing prior to its IPO, the company's year-over-year subscriber growth slowed from 44% in the second quarter to 39% in the third quarter. User growth is really the only defined measure that Twitter can use to push premium ad rates, and if that's slowing, then advertisers may be less eager to pay premium pricing for those lucrative sponsored-ad spots.
The real factor that concerns me is Twitter's ongoing losses and absurd valuation relative to forward sales estimates. At roughly 27 times sales estimates, Twitter is roughly double the forward price-to-sales estimates of Facebook and LinkedIn despite the fact that it isn't profitable, while the latter two social-media networks are! Until Twitter can prove that it belongs with this group, I see no reason to pay this inflated price for the company.
This week's theme is companies with high valuations despite plenty of execution risks. For MiMedx, the potential for high clinical-trial costs to obtain its BLA could spell numerous quarters of ongoing losses. Prothena's extremely evergreen pipeline and lack of regular cash flow could leave investors high and dry waiting for catalysts. Finally, Twitter's valuation premium to Facebook and LinkedIn leaves it little margin for error, which is worrisome, with its membership growth already slowing.
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 Facebook and LinkedIn. 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.