Apparently 200-point intraday swings are becoming the norm. These volatile swings are leading not only to a run on Pepto-Bismol, but also to a surprisingly steady stream of stocks approaching their 52-week highs. 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. The thought of an online stamp company might seem ludicrous considering the proliferation of digital communication these days, but don't tell that to Stamps.com (NAS: STMP) shareholders. The company practically doubled analysts' profit expectations last quarter while reporting a 26% jump in revenue.
Still, other companies might deserve a kick in the pants. Here's a look at three companies that could be worth selling.
A diamond looking rough
You would think that Diamond Foods (NAS: DMND) has struck gold considering the huge gains the stock has seen since it announced its purchase of the Pringles brand from Procter & Gamble (NYS: PG) for $2.35 billion (including debt) back in April. While this does look like a good deal for Diamond Foods on paper, the valuation of the company might be cause for concern.
When fully integrated, Diamond Foods' revenue will double or even triple because of the Pringles deal -- but growth figures might smack of mediocrity when the initial euphoria of this deal wears off. Slated to see profits grow at 16.5% over the next five years and with a forward earnings multiple of 25, there's very little value left in this stock. To top it off, Diamond's piggy bank is feeling drained after its Pringles purchase, with debt-to-equity chiming in at a stratospheric 127%. Time to pass the chips ...
It's all in the electrons
Not to be confused with the latest craze from your local DJ, NVE's (NAS: NVEC) spintronics technology uses nanotechnology to acquire, store, and transmit information using electron movement. This is actually a very innovate process which has led to decent profits, but also plenty of ups and downs. The downside of innovation, as shareholders may learn, is always the customer base.
In all fairness, NVE is a small company of a few dozen employees, but its growth rates don't seem to justify its current valuation. Revenue growth in its latest quarter of 13% seems healthy, but my concern stems from the company's third earnings miss in the past four quarters. To add to this, NVE is valued at nearly 10 times sales and more than four times book value. Instead of NVE, I'd suggest looking into rival Analog Devices (NYS: ADI) , which offers a considerably lower earnings multiple and stronger cash position.
One of the hardest sectors to understand as a value investor is the biotechnology sector. Keeping an abstract and objective view can be hard, but it gets even harder when companies like Ligand Pharmaceuticals (NAS: LGND) ascend to new highs. Engaged in late-stage clinical trials and the acquisition of royalty-generating assets, Ligand simply hasn't shown adequate enough growth to justify its current valuation.
The company's phase 3 results for its hepatitis C drug Promacta do show promise. It was developed in partnership with GlaxoSmithKline (NYS: GSK) . However, rising expenses could be this company's downfall. Guidance does call for Ligand to be cash-flow positive by the year's end, but earnings estimates for next year have been falling rapidly of late. While I try my best not to value a biotech company like every other company, it's a bit hard to ignore a valuation at 93 times forward earnings, 22 times book value, and 13 times sales figures.
This week, it's all about valuation. While all three of these companies are growing, cheaper alternatives exist in their sectors. Don't get stuck with the dead weight of a bloated stock, especially in a volatile market.
What's your take on these companies? Are they sells or belles? Tell us your thoughts in the comments section below and consider adding Diamond Foods, NVE, and Ligand Pharmaceuticals to your watchlist.
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. The Motley Fool owns shares of GlaxoSmithKline.Motley Fool newsletter services have recommended buying shares of GlaxoSmithKline and Procter & Gamble. 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.
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