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.
Keep in mind that some companies deserve their current valuations. Take casino and hotel operator Las Vegas Sands (NYSE: LVS ) , for example, which is approaching a new 52-week high on the heels of strength in its Macau business. Targeting a broader class of Chinese citizens and tourists, Las Vegas Sands has supplanted Wynn Resorts in growth and is putting itself atop the casino sector.
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 (NYSE: RKT ) has found its way onto my "sell-now" radar.
Rock-Tenn has been on fire this week after receiving an upgrade from Bank of America/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 (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 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's (NYSE: SSTK ) chart, because I'm fairly confident that you'll need a picture to remember when it was this high a year from now.
Shutterstock 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.
I'm so confident in my three calls that I plan to make a CAPScall of underperform on each one. The question is: Would you do the same?
Should you gamble with Las Vegas Sands near a 52-week high?
For many companies, successfully capitalizing on a booming Chinese economy is like winning the jackpot. That's indeed the case for gaming company Las Vegas Sands, which made a big bet on Macau gaming about a decade ago that's paid off in spades. The company is now looking to spread its empire further, but will it be able to replicate its prior successes? Learn about all these opportunities, and the risks they pose, in our premium report on Las Vegas Sands. Be sure to claim your copy today by clicking here.
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