The broad-based S&P 500 may be nearly 4% off of its all-time highs set just a hair over two weeks ago, but you certainly wouldn’t know it by the more than 2,100 stocks in the Motley Fool CAPS database that are trading within 10% or less of 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. Big-box retailer Best Buy Co., Inc. (NYSE:BBY) had essentially been written off for dead because of online competition, but a shuffled strategy that focuses on mobile, traffic-driving products, price-matching, and cost-cutting, has ignited profits. Earlier this week, Best Buy Co., Inc. (NYSE:BBY) delivered a $0.32 per share profit compared with expectations of just $0.12. That’s easily worth a new 52-week high if not more!
Still, other companies might deserve a kick in the pants. Here’s a look at three companies that could be worth selling.
Selling at the Lowe’s
Despite having been beaten in almost every metric by Home Depot since the recession, Lowe’s Companies, Inc. (NYSE:LOW) shares are on fire, fueled by a strong rebound in housing that, in turn, has been promoted by historically low lending rates. Whether people are furnishing a new home or merely remodeling an existing one, the cost of a loan to finance such an activity has rarely ever been lower than it is now, which is great news for the home-improvement sector.
Yesterday, Lowe’s Companies, Inc. (NYSE:LOW) reported what Wall Street would deem a fantastic quarter. The company delivered a 10% increase in sales to $15.7 billion and EPS of $0.88. The Street, on the other hand, was looking for a modest profit of $0.79 per share on $15.1 billion in sales. It may seem like these home improvement stores are having trouble keeping up with demand, but Lowe’s is actually a lot more fragile than it might appear on the surface.
My big worry with Lowe’s Companies, Inc. (NYSE:LOW) has always been its reliance on appliance sales to really drive margin expansion. Lowe’s has done a decent job cutting costs and promoting its direct-to-consumer sales (perhaps the one edge I’d give it relative to Home Depot), but it’s still more intricately tied to the health of the homebuilding sector than Home Depot because of its appliance-heavy product portfolio. This is troublesome, because lending rates are at their highest levels in almost two years, and that could cause a quick paring back in consumer spending for homeowners who’ve been spoiled for years with ever-lowering interest rates. When the Federal Reserve does finally begin winding down QE3, that will also negatively affect home-improvement purchases.
At roughly 18 times forward earnings for Lowe’s Companies, Inc. (NYSE:LOW), the pitfalls appear to outweigh the reward here, and I’m going to flip my CAPScall to underperform from outperform.
Too many hops
I don’t know about you, but I consider myself to be somewhat of a beer snob/connoisseur. You know those people who take notes on all of the different beers they drink? Yeah, that’s me! With that being said, you’d think I’d be a supporter of Craft Brew Alliance Inc (NASDAQ:BREW), which is made up of the Widmer Brothers, Kona, Omission, and Redhook brands — but that’s not the case.
