With 54% of the stocks in the Motley Fool CAPS Screener database within 10% or less of a new 52-week high, I’m beginning to think that not even the kitchen sink can stop this rally. 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 The Goodyear Tire & Rubber Company (NASDAQ:GT) as a perfect example. The Goodyear Tire & Rubber Company (NASDAQ:GT) pumped up profits in the second quarter thanks to a 42% boost in income in Latin America and easily soared past the Street’s EPS forecast by $0.28 per share. Furthermore, The Goodyear Tire & Rubber Company (NASDAQ:GT) guided toward the high end of its previous operating income forecast, signaling that auto sales may help improve weak tire volumes. With rubber prices still well under control, The Goodyear Tire & Rubber Company (NASDAQ:GT) is a cash flow juggernaut that cannot be counted out, even at a 52-week high.
Still, other companies might deserve a kick in the pants. Here’s a look at three companies that could be worth selling.
My fellow Fools have been all over this wet noodle, but I haven’t had my say on Noodles & Co. just yet. Debuting just weeks ago, Noodles & Co., a fast-food chain of close to 350 restaurants that serves up (you guessed it!) pasta dishes as well as sandwiches, soups, and salads, more than doubled on the day of its IPO, with shares soaring an additional 20% since then. Just what are they putting in the pasta at Noodles & Co.? Nothing tangible for investors, I’d say!
I’m sort of at a loss to begin because there are so many issues to tackle. How about a lack of geographical diversity, for one thing? Noodles & Co. has restaurants in 25 of 50 states (and the District of Columbia), but 74% of its restaurants are piled into just nine states! If you look at their geographic breakdown in their S-1 prospectus (page 69 for those interested), it’s as if they purposely tried to cram restaurants into states that offer the worst winter weather. Even Panera Bread Co (NASDAQ:PNRA) occasionally finds its sales at the mercy of Mother Nature. With winter so bleak in many of the states Noodles & Co. operates in, I can’t foresee many years of exceptional growth ahead.
That leads me to my next point: a lack of same-store sales growth. In the same prospectus, Noodles & Co. points out how it’s grown the number of new stores by an average of 16% per year since 2004. However, revenue has jumped by just 15.2% since 2008. That would basically imply that adding stores is the only reason sales are improving, and that average revenue from existing stores is failing to keep up with expansion.
With projections this year of roughly $353 million in revenue and about 350 restaurants, Noodles & Co. is bringing in an average of just above $1 million per store but raked in less than $14,000 in average profit per store over a trailing-12-month period. By contrast, Panera Bread Co (NASDAQ:PNRA), with its 1,708 stores as of the end of the second quarter, is more geographically diverse, is forecast to bring in an average of $1.41 million per store this year, and generated an average of nearly $110,000 in profit per store over the trailing-12-month period.
At nearly 80 times next year’s projected profits, this is one IPO to leave on the stove as it’s clearly too hot the handle.