Yesterday’s Automatic Data Processing (NASDAQ:ADP) employment data may not have struck a chord with optimists, and North Korean tensions appear to be escalating, but that didn’t stop the S&P 500 (S&P Indices:.INX) from notching two all-time record highs in the past week. 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. Health insurer Aetna Inc. (NYSE:AET), for example, hit a 52-week high following word that the Centers for Medicare and Medicaid Services had reversed its original recommendation to cut Medicare Advantage rates and instead favored a 3.3% increase to the reimbursement rates. This move was a key victory for Aetna Inc. (NYSE:AET) and the insurance industry, which used its lobbying power to fight back against Obamacare’s health-reform initiatives.
Still, other companies might deserve a kick in the pants. Here’s a look at three companies that could be worth selling.
The waiting game
I’m not a huge fan of short-term underperform calls, but I’m having a hard time getting behind the optimism in Neurocrine Biosciences, Inc. (NASDAQ:NBIX) considering that we won’t hear anything about Elagolix, its leading experimental treatment for pain associated with endometriosis, until at least the first quarter of next year.
Elagolix turned in fairly impressive results in mid-stage trials, with 86% of patients reporting as “much improved” or “very much improved” under the Patient Global Impression of Change guidelines after a 24-week regimen compared to just 74% for the placebo group. Neurocrine even received a nice bump in the form of collaborative revenue from its Elagolix licensing partner AbbVie Inc (NYSE:ABBV) in the fourth quarter, reporting a profit of $0.14 when a loss was expected by the Street.
But what this comes down to is that Neurocrine Biosciences, Inc. (NASDAQ:NBIX) has no drugs currently approved by the Food and Drug Administration, and it’s likely to burn in the neighborhood of $50 million to $55 million in cash this year. Even if Neurocrine delivers favorable results from its phase 3 trial on Elagolix in the first half of 2014, it still has a second trial to finish. Data from that trial won’t be available until 2016, which is likely the same year we’d see an FDA approval for Elagolix, meaning the chance of a profit is still about a half-decade away! While I’m not gung-ho negative on Neurocrine because of its mid-stage data, its current $800 million valuation just doesn’t seem justified with so few near-term catalysts.
Sprechen sie sell?
Language software developer Rosetta Stone Inc (NYSE:RST) must be doing something right, because its whispers of sweet nothings into the ears of shareholders have sent its stock roaring higher by 36% since the end of February. A change in its CEO last year, coupled with a drastic reduction in costs heralded by the closing of more than half its in-mall kiosks, helped drive profits in the near term. But the long-term outlook for Rosetta Stone Inc (NYSE:RST) Stone still looks dreary at best.
To begin with, where on earth is the revenue growth going to come from? Fellow Fool Rich Smith astutely points out that Rosetta Stone Inc (NYSE:RST)’s $8.5 million purchase of Livemocha will bring 16 million new customers into the fold, but not a single Livemocha customer pays a fee for the service. Good luck converting those members, Rosetta Stone!
