The long-awaited announcement that the FOMC would begin to taper its monthly economic stimulus finally came to fruition yesterday, and the simple clarity of the situation rocketed the broad-based S&P 500 to a fresh all-time 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. While certainly not sporting a cheap valuation based on traditional fundamentals, Facebook's (FB 3.86%) new 52-week high looks sustainable given that it's set to roll out video ads in its desktop and mobile news feeds today, albeit without sound, that will automatically play. The move should deliver a sizable jump in Facebook's mobile ad revenue and continues to reinforce the emphasis that Facebook has indeed become a "mobile company" per CEO Mark Zuckerberg's own proclamation.
Still, other companies might deserve a kick in the pants. Here's a look at three that could be worth selling.
This has arguably been the year of the biotech with numerous biopharmaceutical companies, big and small, advancing in some cases by triple-digits or more. One company that certainly fits that description is clinical-stage RNAi-therapeutics company Arrowhead Research (ARWR 4.39%), which has more than quadrupled this year based on optimism that its conjugate platform drugs to treat obesity, melanoma, and hepatitis B could literally rewrite how to treat these diseases.
I will absolutely give credit where credit is due that Arrowhead Research's technology platform has value, and the company's efforts to expand beyond just one treatment indication speak to the potential value of RNAi-based therapeutics. But, like always, I'm left asking "Where's the beef?" after the company's huge run in 2013.
Arrowhead's pipeline only consists of four compounds -- ARC520, adipotide, CRLX-101, and a tubulin inhibitor -- but it doesn't have any experimental compound past the early stages of development. While these drugs have shown promise in preclinical studies, this may not justify Arrowhead being valued at nearly $290 million until we see more concrete mid- and late-stage results. Furthermore, Arrowhead was sporting less than $31 million in net cash as of the end of its most recent quarter, which necessitated it to issue $60 million worth of shares in October. This means the possibility of more dilutive share offerings is fairly high with Arrowhead now trading above $9 and staring down considerable clinical trial costs over the next three years.
My suggestion would be to take the gift Wall Street has given you here and stick to the sidelines until we have tangible later-stage data.
I've got that "sinking" feeling
There are few sectors that have been as strong since the recession as homebuilders and home furnishing accessories providers. This is one of the reasons that Norcraft Cos. (NYSE: NCFT) recently went public so as to take advantage of a friendly investing environment for anything home-related and raise up to $100 million in IPO cash in the process. But I have to admit that this recent IPO is giving me that "sinking" feeling.
On one hand, Norcraft should be able to take advantage of the growing desire for homeowners to remodel their homes, including their kitchens and bathrooms, which is Norcraft's specialty since the company deals in cabinetry. Whether the housing market is booming or people are hunkering down in their homes, Norcraft is well-positioned to continue making sales.
What concerns me about Norcraft is that it's needed to be more cost-conscious about its pricing in recent years while also boosting its promotional activity in order to improve its brand image. The end result is that Norcraft hasn't delivered a solid annual profit since 2007 all while its gross margin has shrunk in each year since 2010. That's not particularly good news with the bread-and-butter growth environment for remodels in the rearview mirror.
My suggestion would be to wash your hands of Norcraft until it proves capable of consistently turning a profit.
Cool product, no profits
Another prevalent aspect of this multiyear rally has been the emergence of new technologies that demonstrate incredible top-line growth but are lacking when it comes to tangible profits.
A company that would fit this bill is proprietary microfluidic systems manufacturer Fluidigm (FLDM 4.72%), which offers gene-expression and mapping systems that can literally isolate and process individual cells! Obviously, the market for this is incredible as it could add to an already growing market of personalized medicine options that may help to eliminate the guessing game by physicians as to what the best course of treatment might be for a particular ailment. In addition, it's quite likely with its proprietary technology that Fluidigm will maintain strong pricing power and be able to grow its revenue at double digits over the next couple of years.
On the flip side, though, it looks as if Fluidigm will be running in the red due to workforce expansion and research and development costs at least through 2016 by my estimates. Fluidigm is also likely to continue to slowly burn through its remaining $2.49 in cash per share as it spends on further product development. Like the previous two companies, the business model isn't in question so much as the tangible results. Show me the money and I'll show you my support, Fluidigm!