The stock market has been gyrating enough lately to make a rollercoaster enthusiast wail in delight, which has created dozens of new lows. Oddly enough, there are equally as many companies within 5% of a new 52-week high. For optimists, these rallies may seem like a dream come true. For skeptics like me, they're opportunities to see whether companies trading near their 52-week highs have actually earned their current valuations.
Keep in mind that some companies deserve their lofty valuations. Kimberly-Clark (NYS: KMB) continues to not only buck the negative market trends but post increases in organic sales growth. As it's now yielding 4.3%, it's no wonder shareholders can't get enough of this company.
Still, other companies might deserve a kick in the pants. Here's a look at three companies that could be worth selling.
Back this up!
Stock market be damned; Carbonite (NAS: CARB) was going to get its IPO done last week whether investors were ready for it or not. As has become the norm of recent IPOs, Carbonite released only a small allotment of shares for trading and has since traded up considerably from its going-public price of $10. Normally it's not policy for me to pick on fresh IPOs, but I'll make an exception here.
Carbonite's business platform of backing up consumer and business information online for a fee makes sense. Unfortunately for investors, the underlying financials at the moment do not. Over the past six quarters, Carbonite has slowed dramatically with sequential quarter-over-quarter customer growth dropping from 18% to just 7%. Not surprisingly, Carbonite has been unprofitable since its inception and has seen consistently negative free cash flow. As with recent IPOs that I've laid into, such as LinkedIn (NAS: LNKD) and Renren (NAS: RENN) , it's very hard to justify buying into Carbonite at this point. Thanks, but no thanks.
A bitter breakup
I'm probably about to get hate mail from millions of people worldwide for this, but it's time to give Hershey (NYS: HSY) a kiss goodbye. The chocolate and confectionery product giant has fared well amid the market's weakness -- perhaps a bit too well. Considering that food prices have been steadily increasing, this means that it's likely Hershey will be forced to either trim its margins or pass along some very unwanted price increases to consumers in the very near future.
Rising prices aren't the only aspect of the company that worries me. Relative to its peers, Hershey appears to be an expensive company. Valued at 18 times forward earnings, almost 13 times book value, and with a PEG ratio of 2.6, its stock is beginning to look more bitter and less sweet. Even the company's payout ratio has crept over 50%, leaving me skeptical of how rapidly its dividend will rise in the intermediate future. I'd advise passing on Hershey at these levels.
The water utility sector isn't exactly going to make you a millionaire overnight, but there are several companies within that sector that offer a good mix of value and growth. Several weeks back I profiled American Water Works (NYS: AWK) as one of my favorite mid-cap companies while singling out a few companies that were definitely worth passing up, including York Water (NAS: YORW) .
York Water, much like American Water Works, shares a projected revenue growth rate in the mid-single digits, but unlike American Water Works, offers a significantly higher payout ratio (70% vs. 52%), price-to-book value (2.4 vs. 1.2), and forward P/E (21.1 vs. 15.4). In short, you can purchase American Water Works and get a company trading at a lower forward multiple with a higher dividend yield that also is far more likely to raise that dividend yield than York. If I were a York shareholder, I'd be dripping with excitement to make that switch.
We're back to the basics this week. Just because a company has outlasted a bad market doesn't mean there aren't cheaper alternatives in the sector. When the risks begin to outweigh the rewards as they do with these stocks, it's time to move on.
At the time thisarticle was published Fool contributorSean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong Motley Fool newsletter services have recommended buying shares of Kimberly-Clark. Try any of our Foolish newsletter servicesfree 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 adisclosure policythat never needs to be sold short.
Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.