Even though cost-cutting has been the primary reason for most EPS beats early on this earnings season, the broad-market S&P 500 (INDEXSP:.INX) continues to take out new all-time closing highs on a nearly everyday basis. For skeptics like me, that’s an opportunity to see whether companies have earned their current valuations.
Keep in mind that some companies deserve their current valuations. Take Texas Instruments Incorporated (NASDAQ:TXN), for example, which reported better-than-expected second-quarter results earlier this week as it’s beginning to reap the benefits of moving away from semiconductors used in wireless devices and instead focusing on those used for power management and in automobiles. With far less competition in these areas, Texas Instruments Incorporated (NASDAQ:TXN) is expected to generate more robust margins.
Still, other companies might deserve a kick in the pants. Here’s a look at three companies that could be worth selling.
Lights out, China
China may have its fair share of struggles — which has caused its strong economy to back off its 30-year average growth rate of 10% — but when push comes to shove, plenty of investors are still paying close attention to multinational companies making investments in China. However, if there were one sector with a gigantic “beware” stamp attached to it, it would be Chinese solar panel producers like Hanwha Solarone Co Ltd (NASDAQ:HSOL).
Hanwha Solarone Co Ltd (NASDAQ:HSOL) and much of the Chinese solar sector have seen enormous rallies in recent weeks on the heels of news from China that it plans to add 35 GW of solar energy by 2015. Even with prices nowhere near optimal, this move is seen as a way for the Chinese government to support a very debt-riddled sector. But two key factors are working against Hanwha Solarone Co Ltd (NASDAQ:HSOL).
To begin with, Europe is set to enforce a whopping 67% tariff on Chinese solar panels beginning early in August. This movie will wipe out almost any pricing advantage Chinese companies had in Europe. The other factor here is the health and pricing power that U.S. solar producers like First Solar, Inc. (NASDAQ:FSLR) suddenly have. Comparatively speaking, First Solar, Inc. (NASDAQ:FSLR) has strong free cash generation and $439 million in net cash. Hanwha Solarone Co Ltd (NASDAQ:HSOL) has had a free cash outflow in all but one year since inception and boasts $622 million in net debt with a shrinking cash pile. With First Solar, Inc. (NASDAQ:FSLR)’s higher-efficiency panels and lessening costs, it can give any Chinese manufacturer a run for its money in the States and even overseas.
With the prospect of profitability a long way off, I’d say even something as simple as survivability could be in question with Hanwha, and, as such, would recommend hitting the exits here.
Don’t fight history
Sometimes we just have to remember as investors that there isn’t room enough for every company to succeed. Thus enters dELiA*s, Inc. (NASDAQ:DLIA), an online and mail catalog retailer that markets apparel to teenage girls and young women.
Some common thoughts might enter your mind here, such as, “That sounds like a core niche where it should be able to expand its market share,” or, “Focusing on Web sales, it should have no trouble reaching young consumers.” What I need you to do now is take those thoughts and completely throw them out the window, because that isn’t the case with dELiA*s, Inc. (NASDAQ:DLIA) at all. In fact, in dELiA*s, Inc. (NASDAQ:DLIA) most recent quarter, it delivered a depressing 14.6% decrease in cumulative revenue and a same-store sales decline for its prominent retail segment of 7.1%. Furthermore, gross margins declined by 740 basis points in its retail segment as it turned to steep markdowns to help move excess inventory.