Prior to Italy's giving the market quite a scare yesterday, close to 500 companies were sitting 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 52-week highs have actually earned their current valuations.
Keep in mind that some companies deserve their lofty valuations. Kansas City Southern (NYS: KSU) and the entire railroad sector are absolutely on fire right now, and deservedly so. The company reported a 58% pop in profits last quarter due to a 7% jump in shipping volume and more favorable pricing.
Still, other companies might deserve a kick in the pants. Here's a look at three companies that could be worth selling.
Don't count those chickens just yet
Biotech investors have a nasty habit of counting their chickens before they're hatched and it's been known to get investors in trouble. Just this week, Targaceptimploded on news that its stage 3 experimental depression drug failed to meet efficacy goals. This is why shareholders of Medivation (NAS: MDVN) should exercise serious caution.
I'm not saying that the reported five-month benefit of MDV3100, Medivation's stage 3 prostate cancer candidate, should be overlooked, because I want cures for these terrible diseases just like everyone else. But looking at this objectively, the company is being valued as if the approval has already been issued. The prostate cancer arena is riddled with competition, from Dendreon's (NAS: DNDN) pricey Provenge to Exelixis' (NAS: EXEL) drug candidate, cabozantinib. Without the FDA's stamp of approval, Medivation is just another biotech burning through both cash and investors' patience.
As a beer aficionado, I can appreciate Boston Beer's (NYS: SAM) attempt to move away from conventional mass produced beer into something that I would happily share with my friends. Unfortunately, one of the things I wouldn't remotely consider sharing with them right now is Boston Beer's stock, which seems to be, pun fully intended, a bit frothy.
Although most of the conventional brewers have struggled with high unemployment rates, Boston Beer has managed to thus far buck that trend. But there's only so much carbonation you can fit in this bottle. Valued precariously at 24 times forward earnings, 7 times book value, and not currently paying a dividend, unlike many of its peers, there are simply too many risks built into its stock at these levels. As long as unemployment rates remain high, buying this stock near $100 is like playing with fire.
Still inside the hen
So, you remember that talk I had about counting your chickens before they're hatched? Well, betting on Inhibitex (NAS: INHX) is like betting on the chicken inside the egg before its even been laid by the hen!
Earlier this week, shares of Inhibitex soared following positive data on the company's phase 2 clinical trial for INX-189, an experimental oral treatment for hepatitis C. Much like Medivation, shares are being priced as if this drug has been approved and is marching to the assembly line, when in actuality, it's still a long way from being approved by the FDA. For starters, the competition in this sector is fierce between Pharmasset, Vertex Pharmaceuticals (NAS: VRTX) , and Merck. Secondly, it will only take two, perhaps three years, for Inhibitex to burn through its remaining $52.7 million in cash. The trading action in Inhibitex has speculation written all over it, and I'd advise keeping a safe distance.
This week it's all about showing me the results. With competitors lining up in droves for a piece of the pie, I'm going to need to see concrete results from these companies before I give them two thumbs up at their current valuations.
What do you think: Are these three stocks sells or belles? Share your thoughts in the comments section below and consider adding Medivation, Boston Beer, and Inhibitex to your free and personalized watchlist to keep up on the latest news with each company.
At the time thisarticle was published Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He has personally tried 951 different beers and has the notes to prove it. 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 Dendreon, Boston Beer, and Exelixis. Motley Fool newsletter services have recommended buying shares of Vertex Pharmaceuticals, Boston Beer, and Exelixis. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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 that never needs to be sold short.