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YRC Worldwide, Inc. (YRCW), Union Pacific Corporation (UNP): Raise The Yellow Caution Flag

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With economic data taking a backseat to a slew of better-than-expected earnings reports, the broad-based S&P 500 continues to knock off one all-time record close after another. 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 railroad operator Union Pacific Corporation (NYSE:UNP) for example. Union Pacific grew profit by 11% in its most recent quarter as it was able to offset demand weakness in coal with higher prices. With many railroad operators predicting a pickup in shipments in the second half of the year, Union Pacific Corporation (NYSE:UNP) certainly looks to be in great shape moving forward.

Still, other companies might deserve a kick in the pants. Here’s a look at three companies that could be worth selling.

Raise the yellow caution flag
In spite of trucking company YRC Worldwide, Inc. (NASDAQ:YRCW)‘s share price doubling last week following the company’s first quarterly profit in six years (that’s right… six years), shares are still down a mind-boggling 99.9928% over the past decade. Somehow avoiding bankruptcy a few years back by diluting existing shareholders into oblivion, YRC has investors now thinking the company may be on the mend. However, its history makes me believe otherwise.

YRC Worldwide, Inc. (NASDAQ:YRCW)While YRC Worldwide, Inc. (NASDAQ:YRCW)’s operating ratio did come in below 100, signaling profitable operations, it achieved a significant portion of its profits ($4.5 million) from the disposition of assets. So really, we’re talking about a one-time boost to its bottom line rather than a sustained rebound. The company’s YRC Freight segment keeps delivering a precipitous drop in revenue and YRC Worldwide, Inc. (NASDAQ:YRCW) has been utilizing price hikes in order to try to boost its bottom-line results. In addition, YRC has roughly $1.2 billion in net debt, which pushes its book value to an impressive (and by impressive I mean downright scary) negative $76.68 per share!

The problem isn’t just that YRC Worldwide, Inc. (NASDAQ:YRCW)’s business isn’t really equipped to compete with its peers — it’s that the entire trucking industry is still in the midst of a fragile recovery. With trucking demand still weak, YRC’s pricing power will remain minimal at best, which will only compound its seemingly never-ending recovery.

In short, I feel YRC Worldwide, Inc. (NASDAQ:YRCW) is far from out of the woods and would seriously consider waving the yellow caution flags after a 100% run higher over the past week.

Can you hear me now?
Unlike YRC, which I consider to be in awful shape, audio communication solutions maker Plantronics, Inc. (NYSE:PLT) is merely a sell in my book based on its recent share price appreciation.

Plantronics reported its fourth-quarter results earlier this week, and by all accounts they weren’t bad. Net revenue grew 15% as unified communications revenue (Bluetooth handsets) jumped 34% because of rapidly growing demand in China and increasing global legislation that requires the use of hands-free devices while driving.

However, I also couldn’t help but notice that adjusted gross margin fell 160 basis points to 52.3% from the year-ago period. While that’s still at the high end of Plantronics, Inc. (NYSE:PLT)’ gross margin range over the past decade, it’s also concerning because the Bluetooth devices that Plantronics makes, like practically all electronic devices, are subject to commoditization. I wouldn’t be surprised if Plantronics were to see continued margin deterioration in the coming quarters as competition overseas increased and competitors undercut the company on pricing.

Luckily for shareholders, Plantronics, Inc. (NYSE:PLT) has a moat of cash on hand — about $345 million — which will put a solid floor under any precipitous drops in gross margin. It’s not a lost cause by any means, but at 15 times forward earnings and a growth rate that I project could dip below 5%, I’m not all too excited about its prospects in the interim.

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