The broad-based S&P 500 (S&P Indices:.INX) may be having one heck of a time trying to eclipse its previous all-time high, but that hasn’t stopped a breathtaking 54% of companies listed in the Motley Fool CAPS Screener from trading 10% or less from a new 52-week high. 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. Shares of health care conglomerate Johnson & Johnson (NYSE:JNJ), for instance, are valued at an all-time high in anticipation of receiving a favorable ruling from the Food and Drug Administration on Invokana later this week for Type 2 diabetes. In trials, this SGLT2 inhibitor mopped the floor with Merck & Co., Inc. (NYSE:MRK)‘s Januvia and could represent the next wave of Type 2 diabetes treatments.
Still, other companies might deserve a kick in the pants. Here’s a look at three companies that could be worth selling.
So nice, I’ll bet against it twice!
The first time I bet against independent energy producer Dynegy Inc. (NYSE:DYN), it went bankrupt. Having emerged once again in October, I’m going to advocate pulling the trigger again on a company that simply hasn’t learned.
Dynegy Inc. (NYSE:DYN) shares have rallied significantly since it debuted on the NYSE in October — especially after announcing a deal to purchase five coal plants from Ameren (NYSE:AEE) Energy Resources, a subsidiary of Ameren Corp (NYSE:AEE). Dynegy’s Illinois subsidiary will acquire the additional 4,119 megawatts in production from Ameren which should result in $60 million in annual synergies, according to Dynegy. However, the deal isn’t being financed with cash or stock, but with Dynegy Inc. (NYSE:DYN) assuming $825 million in Ameren’s debt… and debt had nothing to do with Dynegy’s first bankruptcy (I wish you could see me rolling my eyes over here).
The stark reality is that Dynegy Inc. (NYSE:DYN) forecast a loss in 2013 of up to $332 million in mid-January as it struggles under weak electricity pricing and to refinance its debt. Normally when a company emerges from Chapter 11 bankruptcy, it’s in decent shape. But, a closer examination of Dynegy Inc. (NYSE:DYN) would show that the Ameren deal would push its net debt position from approximately $1 billion to greater than $1.8 billion. Even with $592 million in liquidity, shareholders should be sweating bullets. With few growth prospects and plenty of losses on the horizon, Dynegy is still the horror of an investment it was when I chose it to underperform in 2011.
You’re at a 10; I need you at a two
Guidewire Software Inc (NYSE:GWRE), a developer of software for the property and casualty insurance industry, certainly has reason to celebrate after four consecutive quarterly beat downs of the Street’s estimates. Its most recent quarter was the most impressive, with the company earnings $0.21 per share on $72.2 million in revenue when the Street called for just $0.02 in EPS on $64.3 million. Management attributed the solid results to up-selling customers, as well as early payments from customers.
While I feel optimism is deserved, investors are currently expecting the world from Guidewire when they should, in reality, be dialing back their expectations. To begin with, management clued investors into the reason for the beat: up-selling and prepayments. I’d speculate that those prepayments are unlikely to be there next quarter and were more of an end-of-the-year type event. That will drastically reduce quarter-over-quarter comparisons.