Whether or not “sell in May and walk away” will play out this year remains to be seen as the S&P 500 rallied to a new all-time record high to begin this week. 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 Waste Management, Inc. (NYSE:WM), for instance, which has rallied ever since reporting its first-quarter results last week. The company’s internal revenue growth from yield for its collection and disposal operations came in at a two-year high, 1.4%, and the company modestly improved its adjusted year-over-year EPS. Trash disposal and recycling are necessity businesses and make Waste Management a solid long-term buy.
Still, other companies might deserve a kick in the pants. Here’s a look at three companies that could be worth selling.
Time to make the switch
If I could name a sector that I’d certainly tread lightly around considering that consumers are tightening their wallets, it would be the casino sector. Casino companies rely on loose wallets and vacations to drive profits. This is why I feel it could be the time to say goodbye to casino and race track operator Pinnacle Entertainment, Inc (NYSE:PNK) near its 52-week high.
Pinnacle Entertainment, Inc (NYSE:PNK)’s first-quarter report, announced yesterday, wasn’t as bad as many had projected, with the company’s loss smaller than expected despite higher taxes and delayed tax refunds biting into consumers’ pockets. However, what bothers me most about smaller casino operators like Pinnacle Entertainment is that they are completely dependent on consumer spending in the U.S. — and it has been years since the gaming industry in the U.S. has shown any signs of life.
Instead of purchasing Pinnacle Entertainment, Inc (NYSE:PNK), which carries a debt-to-equity in excess of 300%, doesn’t pay a dividend, and is valued at 21 times forward earnings despite a revenue growth rate of just 7%, I’d recommend swapping it out for Las Vegas Sands Corp. (NYSE:LVS). With Las Vegas Sands Corp. (NYSE:LVS), you get U.S. exposure, but you also get rapidly growing exposure to Macau, where Sands’ casino and resorts are catering to a wide swath of income levels. You also get a 2.5% yield with Las Vegas Sands Corp. (NYSE:LVS) and a lower forward P/E ratio with a much quicker revenue growth rate.
Insurance I wouldn’t touch
Let me preface this by saying that I agree with most analyst assessments that the mortgage insurance sector is improving. Legacy defaults from the financial crisis are slowly working their way off many insurers’ books and liquidity for many mortgage insurers is improving. However, I can’t really say the same for MGIC Investment, which I added to my short-list a few weeks ago. This week, I’m also going to add its peer Radian Group Inc (NYSE:RDN) to that list after an abysmal first-quarter report.
For the quarter, which was reported yesterday, Radian Group Inc (NYSE:RDN) saw its losses widen to a whopping $1.30 per share as a fair value derivative change walloped reduced earnings by $173.3 million. Radian Group Inc (NYSE:RDN) did write $10.9 billion in new mortgage insurance and improved its risk-to-capital ratio to 18.6, but it still can’t turn an annual profit. I firmly believe that Wall Street analysts were a bit premature in their call that the mortgage insurance sector is healthy — especially with regard to MGIC and Radian Group Inc (NYSE:RDN), which have both had incredible runs yet continue to report steady losses.
Until I see steady profits and significantly lower risk-to-capital ratios, I’m going to avoid the mortgage insurance sector like the plague.