Rome wasn't built in seven days, but it only took that amount of time for the Dow Jones Industrial Average (Index: ^DJI) to tack on more than 1,100 points from its intraday lows last Tuesday. For optimists, these rallies may seem like a dream come true. For skeptics like me, they're opportunities to see whether companies trading near their 52-week highs have actually earned their current valuations.
Keep in mind that some companies deserve their current valuations. Bargain retailer Ross Stores (NAS: ROST) continues to amaze investors and set a new 52-week high yesterday. The company's same-store sales figures easily trounced analyst expectations for September, and its guidance remains upbeat.
Still, other companies might deserve a kick in the pants. Here's a look at three companies that could be worth selling.
Winter is coming
The forecast could call for a blizzard to wipe out Activision Blizzard's (NAS: ATVI) rosy forecast. If you missed it, August U.S. video games sales fell off a cliff, dropping by 23%. Yet somehow, analyst expectations for Activision have remained flat since retail sales figures for August were released. Now could be the time to get on board with reality and ditch this stock.
Use Shanda Interactive (NAS: SNDA) as an example. Yesterday, I highlighted Shanda as a company to avoid like the plague this earnings season since it has missed analyst profit projections for seven straight quarters. As one of the biggest names in the industry, Shanda offers clues about the health of the gaming industry and those clues point to a sick patient. At 14 times forward earnings, Activision simply seems expensive, especially when you consider that other names in the sector trade at significantly lower earnings multiples. There are too many question marks heading into earnings season, if you ask me.
Don't be a brat
Not to rain on the kids' parade, but Mattel (NAS: MAT) is also up on this week's chopping block. I fear that the maker of toy products could be in for a rough holiday season internationally if consumer worries and high unemployment in Europe persist. There's also an ongoing black cloud overhanging Mattel, stemming from a lawsuit ruling in which it was told to pay MGA Entertainment $309.8 million over the rights to use Bratz dolls. Although Mattel has appealed that ruling, I'm not overly optimistic about the eventual outcome.
I can't say I'm very intrigued by its smaller counterpart Hasbro (NAS: HAS) either, but it represents the better of two evils. Hasbro represents a much better value than Mattel on both a book value and forward P/E basis. In addition, Mattel's 66% payout ratio offers little hope of a higher dividend in the immediate future, while Hasbro's 40% payout ratio makes its already higher yield seem even more attractive. Don't be a brat and fall for Mattel's allure.
One man's trash is ... trash
I admit the bias that I'm not a fan of the waste management sector. The business is a necessity which grants it certain "value," but this isn't a high-growth sector, so I feel it shouldn't support high-growth multiples. This week's beef is with Waste Connections (NYS: WCN) and its forward earnings multiple of 20.
Although it's not uncommon for waste service companies to trade at 20 times earnings, Waste Connections does so at nearly three times book value and at more than 10 times cash flow. Larger rivals Waste Management and Veolia Environnement are valued at only seven and two times cash flow. Even though analyst estimates peg Waste Connections to grow at 16% over the next five years, I simply don't see how that's possible when the company sees revenue growth slowing. Do yourself a favor and send this one down the drain.
Sometimes it really is all about valuation. Although all three companies have been steady growers, macroeconomic problems coupled with cheaper competitors make them poor choices heading into earnings season.
What's your take on these stocks; are they sells or belles? Share your thoughts in the comments section below and consider adding Activision Blizzard, Mattel, and Waste Connections to your free and personalized watchlist to keep up on the latest news with each company.
At the time this article was published The Motley Fool owns shares of Activision Blizzard, Waste Management, and Veolia Environnement, and has written calls on Activision Blizzard. Motley Fool newsletter services have recommended buying shares of Waste Management, Activision Blizzard, Mattel, and Hasbro, as well as creating a synthetic long position on Activision Blizzard and writing a covered strangle position on Waste Management.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 and on Twitter @TMFUltraLong. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that never needs to be sold short.
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