This leads me to the first reason I dislike Clearwater Paper: its valuation. Clearwater’s total cash position is now below $33 million as long-term debt still remains near $524 million. Also, Clearwater is valued at a forward P/E (12.6) that’s nearly twice as high as its projected 2013 growth rate (6.7%). That might appear cheap, but it’s a steep price to pay for a slow-growth business.
The other factor to consider here is the underlying cost of paper (i.e., wood) could head higher given that housing inventories around the country are down dramatically. With fewer homes on the market, homebuilders will be incentivized to build faster, which could drop wood availability and boost prices across the board. This uncertainty is enough to keep me far away from most paper products companies — especially Clearwater.
Don’t get decked
Not to continue to pick on the housing sector and its various suppliers, but what on earth are investors thinking when it comes to wood-alternative deck and railing supplier Trex Company, Inc. (NYSE:TREX)? Trex shares have benefited from a rebound in the housing market spurred by low lending rates. In its most recent quarter, reported Tuesday, revenue fell 10% as its quarterly loss shrank to “just” $0.22 per share from $1.18 in the year-ago period.
I could definitely support a small rally behind results that are “less bad,” but to justify an eight-year share-price high when Trex has lost money in five of the past six years is sheer lunacy!
Take, for example, Toll Brothers Inc (NYSE:TOL)‘s results yesterday, which highlighted a very sizable EPS and revenue miss. Although contracts signed went up 49% — a pretty consistent trend among most homebuilders — Toll’s luxury home selling price actually fell 2% for the full year. If anything, this demonstrates that hiccups still exist in certain aspects of the housing market and that products suppliers still losing money should be tread around with extreme caution.
Trex is valued at about double its price-to-sales level from 2005-2006, when its share price was below where it is now, and when the company was profitable! Until Trex is consistently profitable, I think you’d be crazy to chase this stock higher.
This week was all about exposing weakness in the housing and housing products supply sector. While things have improved, there are still plenty of hiccups left to be uncovered.
The article 3 Stocks Near 52-Week Highs Worth Selling originally appeared on Fool.com and is written by Sean Williams.
Fool contributor Sean Williams has no material interest in any 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 Cisco Systems. Motley Fool newsletter services have recommended buying shares of Cisco Systems and Trex.
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