For those of you expecting the market to collapse, may I remind you that Super-Apple was once again here to save the day! For optimists, these rallies may seem like a dream come true. For skeptics like me, they're opportunities to see whether companies have earned their current valuations.
Keep in mind that some companies deserve their current valuations. LeapFrog Enterprises (NYS: LF) has been bucking general weakness in the toy sector thanks to its innovative $100 tablet targeted at children.
Still, other companies might deserve a kick in the pants. Here's a look at three companies that could be worth selling.
The wishing well
The new biotech fad appears to be piling on companies that specialize in rare diseases. The allure of biotech companies that can master this strategy is a lack of competition and incredible pricing power, but it rarely results in pipelines you can trust. Case in point: Synageva BioPharma (NAS: GEVA) .
Synageva's leading drug candidate is SBC-102, an experimental drug targeting early and late-onset lysosomal acid lipase deficiency. It's true that if Synageva gets this drug approved, it will hold a monopoly on this treatment, but the company doesn't have any other drugs in clinical trials. Investors are essentially betting the farm on four preclinical treatments and one phase 2 clinical trial. That is far from a sure thing. With an accumulated deficit of $116 million and an operating loss expectation of $40 million-$45 million in 2012, I don't see any reason to be excited about Synageva, considering it's up 600% from its 52-week low.
We want to deflate...you down!
If you're a fan of health fitness stocks, turn away now, because I'm about to bash yet another one. This week, Town Sports International (NAS: CLUB) is going to step up to my virtual guillotine after it reported what many deemed strong earnings results just two days prior.
For the quarter, this operator of health clubs in the northeastern U.S. increased comparable club revenue by 4.5% over the year-ago period and more than doubled its net income. But the concern I have relates to its pricey valuation, considering many aspects of its business are slow-growing and subject to high attrition rates based on changing consumer spending habits. Health club and diet operators often have a hard time keeping customers interested in their programs, and we did indeed see a 20-basis-point uptick in customer attrition during the quarter.
Also worth noting is that membership fees dropped during the quarter, which to me signals that the company has very little pricing power. If it can't improve its margins, then I'm definitely not interested in Town Sports at 48 times trailing-12-month earnings.
Change for a dollar
The scent of change is in the air among dollar store chains, and it has investors biting their nails with worry. Perennial underperformer Big Lots' (NYS: BIG) earnings warning earlier this week signaled a possible shift away from cost-conscious purchases to consumers stepping up to more expensive discretionary items. We've also seen this trend take shape with strong sales of brand-name merchandise.
All of this bodes poorly for the not-so-cheap dollar stores, especially Dollar Tree (NAS: DLTR) . After some relatively sizable earnings beats over the past few years, Dollar Tree's marginal EPS beat of $0.01 last quarter signaled the beginning of a shift away from penny-pinching. That's bad news for a company trading at 18 times forward earnings and eight times book value -- and which doesn't pay a dividend. I can think of plenty of places I'd rather have my money right now than Dollar Tree.
This week it's all about the winds of change: Whether it be changing consumers' spending habits or changing investors' perceptions about a biotech's pipeline. I'm so confident in my three calls that I plan to make a CAPScall of underperform on each one. The question is: Would you do the same?
Share your thoughts in the comments section below, and consider using the following links to add these three stocks to your free and personalized watchlist so you can keep track of the latest news on each company. And to avoid investing in stocks like these, consider getting a copy of our special report "The Motley Fool's Top Stock for 2012." In it, 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!
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At the time thisarticle was published Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He last saw the inside of a gym in 2001. 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 Apple. Motley Fool newsletter services have recommended buying shares of Apple and LeapFrog Enterprises, as well as creating a bull call spread position on Apple. 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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