Another day, another reason to ignore any negative economic news as all the major indexes are trading at multi-year (or in some cases multi-decade) highs. For optimists, these rallies may seem like a dream come true. For skeptics like me, they're opportunities to see whether these companies have actually earned their current valuations.
Keep in mind that some companies do deserve their current valuations. Visa (NYS: V) definitely deserves its triple-digit price tag after the financial services behemoth reported earnings growth of 16% last night and authorized a $500 million share repurchase program.
Still, other companies might deserve a kick in the pants. Here's a look at three companies that could be worth selling.
No, you aren't suffering from heat stroke, nor is that a mirage. Conn's (NAS: CONN) , the electronics, appliance, and furniture superstore, is hitting a new 52-week high shortly after whiffing on EPS estimates by nearly 90% in its latest quarterly results.
Conn's is suffering much the same fate as big-box retailer Best Buy (NYS: BBY) in that consumer electronics margins are being crushed under the weight of increased Internet options. Pricing pressure on most electronics, TVs included, are weighing on margins and making it incredibly difficult for these companies to turn a profit. At least in Best Buy's case, the company has a strong balance sheet with plenty of cash. Conn's, by contrast, has more than $300 million in net debt and has seen revenue fall in two straight years. It may seem like a bargain at 13 times forward earnings, but I'm no sucker and am almost counting on another earnings warning in the not-so-distant future.
Same old, same old...
Sometimes a decade changes a company for the better; sometimes for the worse. Then again, in the case of Saba Software (NAS: SABA) , it's just more of the same old, same old for the maker of enterprise solutions software.
A decade ago, Saba was losing money, and it's ending that decade still losing money -- save for one marginally profitable year in 2010. Sales at the software company have been stagnant, growing at an annualized rate of just 4% since 2007. This is a company that is really tweaking the term "cloud computing" to the full extent in order to excite investors about its prospects, but in reality it's the company's transition into the cloud that's causing its GAAP losses to widen even further. Until Saba can prove it can continuously turn a profit, paying 98 times forward earnings for the stock seems rather... lofty!
Finally, we have Rentech (ASE: RTK) , which is promising to wave its magic wand and turn biomass into usable gas. Foolish colleague Rich Smith did some fantastic research on Rentech, describing how its fertilizer subsidiary is the only reason the primary business has remained afloat. Rentech's biofuels division continues to be a drag on the business and remains a pie-in-the-sky long shot of being profitable.
Over the past 10 years, Rentech has reported an annual profit only once (and it was tiny at that), all while diluting shareholders severely. Shares outstanding have increased at an annualized rate of 12.3% per year over the past 10 years, turning positive shareholder equity negative. Until Rentech abandons what I see as its pipe dream, this just isn't a worthwhile investment.
This week we found three companies with lofty goals that often fail to live up to those expectations. History does not always repeat itself -- but with these companies it sure seems to. I'm so confident in my three calls that I plan to make a CAPScall of underperform on each one. The question now is: Would you do the same?
Share your thoughts in the comments section below and consider adding these three stocks to your free and personalized watchlist so you can keep track of the latest news with each company. Also, to avoid investing in stocks like these, consider getting a copy of our latest special report: "The Motley Fool's Top Stock for 2012." In this report, our chief investment officer details a play he dubbed the "Costco of Latin America." Best of all, this report is free for a limited time, so don't miss out!
At the time thisarticle was published Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He thinks we should use super PAC funds to fuel our vehicles. 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 Best Buy. Motley Fool newsletter services have recommended buying shares of Visa and writing covered calls on Best Buy. 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.
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