It’s been a tumultuous, Twitter-hacked, earnings-filled week, yet the market continues to chug higher. For skeptics like me, that’s an opportunity to see whether companies have earned their current valuations.
Still, other companies might deserve a kick in the pants. Here’s a look at three companies that could be worth selling.
Boring doesn’t always mean “buy”
You may have heard me mention recently that boring industries can often make the most profitable industries. That is generally true, but it’s not a rule! This is why packaging products maker Rock-Tenn Company (NYSE:RKT) has found its way onto my “sell-now” radar.
Rock-Tenn Company (NYSE:RKT) has been on fire this week after receiving an upgrade from Bank of America Corp (NYSE:BAC)/Merrill Lynch and reporting second-quarter results that topped estimates by $0.07. Rock-Tenn has been able to outperform in a generally sluggish environment by raising its prices and improving operating efficiencies (a fancy way of saying “cost-cutting”). While this is fantastic for keeping shareholders happy, it doesn’t demonstrate that there are any real growth drivers that would increase the need for packaged products. In fact, the 5.7% decrease in durable goods orders yesterday would insinuate just the opposite — that consumer demand is declining and the need for packaging products may stagnate.
Now, don’t misconstrue what I’m saying; this isn’t a call for the long run. This is more of a valuation call, as it seems silly to pay 11 times forward earnings for a company that may grow 4%-5% organically over the next two years, with nearly all of that growth coming from price increases. There’s simply not enough packing tape that can mask the lack of volume growth here.
Don’t make the wrong Choice
I predict that 2013 will be the return of the “staycation.” In the depths of the recession, instead of taking expensive getaways, consumers chose simply to take time off work and stay home or locally. I think we have the perfect confluence of factors that could make life difficult for Choice Hotels International, Inc. (NYSE:CHH), operator of Comfort Inn, Comfort Suites, and a multitude of other mid-price-point hotels.
The first concern is the increase in payroll taxes and the delay in tax refunds caused by the IRS furlough. Consumers clearly have less to work with in their pocketbook, and that, I predict, will translate into fewer vacations taken. Another concern I have with Choice Hotels International, Inc. (NYSE:CHH) is its valuation. Following a special dividend paid last year of $10.41 per share, shareholders have pumped the company’s valuation up past 21 times forward earnings despite growth rates of just 5%-6%.
On the bright side, I admit that I like the niche price point Choice Hotels hits, and I appreciate its focus on expanding abroad to diversify its product line. However, the simple nature of today’s spending environment isn’t remotely optimistic, with widespread austerity measures now in place in Europe. In sum, the valuation bestowed on Choice Hotels is downright scary, and I’d suggest you call for housekeeping!
Why don’t you take a picture — it’ll last longer
Seriously, why don’t you take a picture of Shutterstock Inc (NYSE:SSTK)‘s chart, because I’m fairly confident that you’ll need a picture to remember when it was this high a year from now.
Shutterstock Inc (NYSE:SSTK) is an online marketplace that provides businesses with more than 25 million different images to use in their advertising. Given the tricky nature of copyrights, it actually has the chance to be a somewhat disruptive company in the space when times are good. The problem is that things aren’t really that good, with cost-cutting being the primary driver of companies’ profits at the moment. Cost-cutting environments are not the time to consider investing in advertising companies of any form.
Then there’s Shutterstock’s valuation, which places it at a whopping 47 times forward earnings, 20 times book value, and roughly seven times next year’s sales figures. It’s not astronomical by any means — especially for an online ad marketplace — but it’s also a bit frothy considering that sales growth is forecast to dip from 29% to 23% next year. It’s a name I’ll certainly revisit in due time, but for now I’d say this picture is worth one word: sell.
Foolish roundup
This week was all about dissecting good business models with a chance to outperform over the long run that are simply in the wrong place at the wrong time for the next couple of years.
The article 3 Stocks Near 52-Week Highs Worth Selling originally appeared on Fool.com.
Fool contributor Sean Williams owns shares of Bank of America, but has no material interest in any other companies mentioned in this article. 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 Bank of America, Choice Hotels International, and Rock-Tenn.
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