You might be compelled to think that territorial tensions between Russia and Ukraine and generally mixed economic data might push the market lower, but you'd be sorely mistaken. In fact, new highs are outpacing new lows by close to a 10-to-1 margin once again. 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. Master limited partnership Sunoco Logistics Partners (NYSE: SXL), for example, recently announced its fifth straight 5% quarterly dividend boost following strong organic pipeline growth and an approximately 20% increase in fee-based cash flow for fiscal 2013. As shale drillers move to boost production, the onus of transmission and storage will fall on midstream providers like Sunoco, which are in perfect position to clean up throughout the remainder of the decade.
Still, other companies might deserve a kick in the pants. Here's a look at three that could be worth selling.
Keep one eye open
First up this week, we have Vanda Pharmaceuticals (VNDA 1.74%), which is riding high after having Hetlioz (formerly tasimelteon) approved by the Food and Drug Administration on Jan. 31 to treat non-24-hour disorder. Non-24 is a chronic condition that affects the blind and interferes with circadian sleep patterns; while the rest of us use daylight and nighttime to keep our sleep patterns regulated, the blind don't have that luxury. Hetlioz is the only FDA-approved therapy to treat this sleep-pattern problem.
Obviously, this allows Vanda to put a beefy price tag on its drug and to control the market of what is estimated to be roughly 100,000 people in the U.S. However, I suspect that much of that optimism has already been priced into Vanda's shares, with the company more than quadrupling over the trailing 12 months. Investors may want to consider heading for the exit.
Consider this: Vanda has been here before following the approval of schizophrenia drug Fanapt in May 2009. I'd argue the company brutally mismanaged the licensing of that drug. Although Vanda received a large sum of working capital from U.S. and Canadian licensing partner Novartis (NVS 0.30%), including an up-front payment of $200 million and ongoing royalties, Fanapt never made much of an impact on the company's bottom line from an earnings-per-share standpoint. Hetlioz has that earnings opportunity, but only if Vanda does a considerably better job of managing and launching its drug this time.
There's also a wide variance for Hetlioz's peak sales potential. Some analysts peg peak sales as high as $500 million, but I've also seen estimates below $100 million. Assuming a midpoint of roughly $300 million, this would mean Vanda is already at two times annual peak sales estimates despite its previous mistakes with Fanapt. That seems a bit rich for a company with a lot left to prove from a commercialization standpoint. I would suggest sticking to the sidelines and letting Vanda demonstrate that it can develop a therapy from start to finish before chasing this stock any higher.
Sometimes companies themselves aren't bad, but their valuation relative to their growth potential just doesn't make sense. I believe this to be the case with Hyatt Hotels (H 2.25%).
Contrary to popular belief, the leisure sector is actually doing remarkably well. Even when consumer spending was iffy at best, vacation and leisure companies outperformed the overall market. In Hyatt's latest quarterly results, it reported a 4.2% increase in comparable system-wide revenue per available room, with the company opening 16 new properties during full-year 2013. Furthermore, it grew EBITDA by 21% in the fourth quarter and repurchased nearly 469,000 outstanding shares in an effort to boost shareholder value. So Hyatt is doing OK in the growth department with higher room rates and improved occupancy.
However, the hotel chain's organic growth rate in the 4%-5% range, and its overall sales growth of 7%-8% when you include new property additions and gains from sold properties, doesn't even begin to make a dent in its current trailing P/E and forward P/E, which are nearly at 40!
There are a lot of variables at work here that could negatively affect the travel sector and a company like Hyatt that is trading at quite the premium. Hotels, for instance, could prove to be very dependent on the Federal Reserve's tapering of quantitative easing. Since hotels are almost always booked using credit cards, the possibility of higher lending rates could trim down American families' vacation budgets. Also, the potential for conflict between Russia and Ukraine could threaten global growth in its entirety which would almost certainly hurt Hyatt.
There are certainly a lot of "what ifs," but what I do know is that Hyatt's $940 million in net debt, its frothy forward P/E, and lack of a dividend make it an easily forgettable and highly avoidable leisure stock.
Lastly, continuing our theme of decent companies with overzealous shareholders, we have tabletop glassware giant Libbey (LBY).
Like the companies above, Libbey has demonstrated improved results over the past couple of years. In its latest report, Libbey delivered sales growth of less than 1% but gross profit growth of 7.1% as adjusted gross profit margin expanded 350 basis points to 24.3%. Tight cost controls and strength in its European and Middle Eastern markets helped drive the positive results.
Yet its latest quarterly income of $9.3 million, which was light-years ahead of the $1.6 million reported in the year-ago fourth quarter, was primarily helped by a considerably lower effective tax rate and cost-cutting measures. As I mentioned above, Libbey's top line actually grew by less than 1% and contracted by 1.4% in the United States, which is by far its largest market.
Libbey isn't particularly expensive at 10 times forward earnings, but its growth rate of 2% leaves a lot to be desired, considering that it doesn't pay a dividend and carries roughly $372 million in net debt. If I were a shareholder, I'm left wondering about the company's catalysts when cost-cutting stops boosting its bottom line. Emerging market growth is helping a bit, but its U.S. business-to-business channel is struggling in a big way. Until we see definitive growth in the U.S., and perhaps a reduction in its outstanding debt, I'd suggest steering clear of Libbey.