Even with the house of cards tumbling down on the housing sector yesterday, and the threat of the central bank purchasing fewer Treasuries and mortgage bonds, well over 200 companies still notched a new 52-week high. 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. Network equipment provider Cisco Systems, Inc. (NASDAQ:CSCO), for instance, dazzled Wall Street with another quarterly earnings beat last week. Cisco, even with the weakness of Europe weighing on its future, projected sales growth of 7% to 8% in 2013 as it continues to transition to cloud-based hardware.
Still, other companies might deserve a kick in the pants. Here’s a look at three companies that could be worth selling.
I’m not quite sure how crazy you have to be to bet against a real estate investment trust in the red-hot housing sector, but apparently I’m there! Sun Communities, Inc. (NYSE:SUI) is an owner of manufactured housing communities primarily in the Midwest, South, and Southeastern U.S. As a REIT, it’s required to pay out at least 90% of its profits as a dividend to shareholders. Between the economic rebound and Sun’s 5.5% yield, shareholders have enjoyed a nice ride since the bottom. Furthermore, Sun’s funds from operations forecast for 2013 of $3.45 to $3.55 per share was ahead of the $3.38 consensus.
Yet I feel there are plenty of reasons to jump ship right here. The biggest concern I have with owning a manufactured housing REIT would be that low rates would either tempt prospective homebuyers into purchasing a house or keep them in their apartments and saving up for a home. Manufactured homes are sort of in a middle ground until lending rates begin to rise, which, I feel, will crimp Sun’s growth opportunities from an organic basis in the interim.
Also, even with its impressive cash flow, Sun’s $1.23 billion in net debt would cause me to sleep poorly at night. Sun’s business model, at least at the moment, necessitates it continue to make acquisitions in order to spur FFO growth. Unfortunately, these acquisitions are only going to further drive up its debt levels. With Sun at roughly 13 times projected FFO, shareholders are left with very little room for error.
If you’ve got an issue, stay away from this tissue
The paper business is far from exciting, but sometimes the least exciting businesses make for the best long-term investments. However, tissue, paperboard, and pulp producer Clearwater Paper Corp (NYSE:CLW) is not on that list — at least for me!
Clearwater Paper reported its fourth-quarter earnings last night and, while surpassing EPS estimates by $0.08, it fell short on revenue estimates by $5.4 million. Cost synergies from its purchase of Cellu Tissue helped reduce its total expenses, yet overall net selling prices of its non-retail tissue, as well as its paperboard and pulp, fell from the previous year.
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.
Foolish roundup
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.
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?
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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