Spain is finally coming to terms with the fact that it needs financial assistance, and the markets praise the move -- go figure! 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. NPS Pharmaceuticals (Nasdaq: NPSP ) , for example, has rallied considerably in anticipation of a favorable FDA panel review of its drug hopeful Gattex, for treatment of short bowel syndrome. It's already received orphan drug status in the U.S. and Europe, and clinical testing appears likely to support an eventual approval of the drug in the United States.
Still, other companies might deserve a kick in the pants. Here's a look at three companies that could be worth selling.
This ain't nothin' but a hound dog!
Hopefully, through time and perhaps a few carefully placed cheery tweets, my Foolish colleague Rick Munarriz can forgive me for leading off this week by placing an underperform bet on Tex-Mex restaurant chain Chuy's Holdings (Nasdaq: CHUY ) .
Trust me, I have nothing against a company that will place a novelty shrine to Elvis in every location, or that caters to cost-conscious consumers to get them in the door, but I do have a problem with the company's sky-high valuation.
There are still far too many question marks with Chuy's to justify a forward P/E in excess of 40. For one, low menu prices do tend to draw in customers, but rapidly rising corn prices will continue to eat into margins. Unless Chuy's head cook is David Copperfield and it can get its patrons to add-on high-margin alcoholic beverages with each meal, its margins could weaken further. Second, it's really not growing anywhere near as quickly as some of its peers. As Foolish Tex-Mex connoisseur Dan Caplinger pointed out, Chuy's comparable-store sales growth isn't even in the same ballpark as, say, Chipotle Mexican Grill (NYSE: CMG ) . Chipotle offers a similar valuation to Chuy's based on forward P/E, but delivers high single-digit comparable-store growth. Chuy's was just 1.9% based on its most recent quarterly report.
The restaurant sector is highly competitive, and until comparable-store sales growth improves to match its valuation, I can't support Chuy's Graceland valuation.
Look out Below!
Rarely do I ever try to assume to have the slightest idea of what is considered cool these days, nor will I ever try to understand the mind of a teenager. But I can't help but question the current valuation of specialty discount accessories retailer Five Below (Nasdaq: FIVE ) following its recent IPO.
In spite of the company getting sound praise from Fool David Meier's daughter, I have certain qualms with its long-term plan. One aspect that stands out from a historical perspective is that no retailer can consistently pick trendy items with 100% accuracy. As soon as Five Below fails to get the right product in its stores, that valuation, which currently places the company at greater than 55 times next year's earnings, is bound to come crashing down.
Inventory control is also a major concern with the company expanding as rapidly as it is now. Deckers Outdoor and Crocs had equally popular items with teens and their share prices have been crushed by poor inventory management and rising costs.
Finally, there's no reason Amazon.com couldn't just come in and say, "You know what, we can do that too!" Teens and pre-teens do prefer bricks-and-mortar locations, but the money is ultimately coming from their parents, who'd just as soon avoid the mall and buy those products even more cheaply on Amazon, or at a one-stop shop like Wal-Mart.
Five Below has a lot to show me before I'm jumping on board the bandwagon.
A market leader you don't want
Integrated information management solutions provider Tyler Technologies (NYSE: TYL ) may hold the lion's share of the market on state and local government financial solutions, but it's not a stock that's piquing my interest from a buy-side perspective in the least.
My biggest concern with a company like Tyler Technologies has to do with declining government spending around the nation due to falling consumer spending and slowing economic growth. Many states currently have budget deficits that are going to be addressed by tightening government spending. That has a chance to lead to reduced spending on Tyler's software, or, alternatively, could reduce the amount of new business it procures dramatically. If Tyler tries to recoup a lack of new business with price increases, it could alienate its subscribers, who will turn to its competitors.
At roughly 35 times forward earnings and with $65 million in net debt, just like the others listed above, Tyler has a lot to do before it proves its actual worth to me.
It's always about valuation in the end, but this week I primarily made my selections about valuation. None of these three companies have shown enough consistency to justify their frothy valuations, period!
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