Even with the broad-based S&P 500 retracing for three straight days amid worries that the Federal Reserve may begin paring back its monthly bond-buying program as early as next month, more than 2,550 stocks finished yesterday within 10% of a new 52-week high. For skeptics like me, that’s an opportunity to see whether companies have earned their current valuations.
Still, other companies might deserve a kick in the pants. Here’s a look at three companies that could be worth selling.
Why ask YY?
Let’s get this out of the way early: We could make puns about YY Inc (ADR) (NASDAQ:YY)‘s name and be here all day, but for the sake of why you should consider heading for the exits, I’m not going to do that.
It isn’t hard to understand why shares of YY Inc (ADR) (NASDAQ:YY) have headed through the roof. This China-based social media platform saw its revenue explode higher by 118% during the second quarter, led by a 189% increase in YY music segment revenue and an 87% boost in online gaming revenue. Operating income also rose by nearly threefold and handily topped estimates.
Despite these strong results, I’ve seen this game played far too many times with Chinese social media platforms. Next year, revenue growth will practically halve from 104% this year to “just” 55%, all while expenses soar as YY Inc (ADR) (NASDAQ:YY) overestimates its newfound success and spends heavily on new gaming and music platforms meant to drive new paying customers. I’m not saying YY won’t eventually be successful, because it’s already profitable, so that’s not even in question. What I am saying is that YY’s valuation here makes little sense with the understanding that expenses will rise and revenue growth will slow as its business matures and competition increases. YY is going to need multiple quarters like its most recent one just to maintain its current valuation and I just don’t see that happening.
Counting your chickens before they’re hatched
Make no mistake about it, I would love to see sufferers of Duchenne muscular dystrophy get one or two possible new treatments over the next year; but I believe the expectations that shareholders have baked into these stocks, especially Prosensa Holding NV (NASDAQ:RNA), may be a bit too much to endure.
Prosensa Holding NV (NASDAQ:RNA) is currently developing a late-stage drug with GlaxoSmithKline plc (ADR) (NYSE:GSK) known as drisapersen that’s being tested on a patient pool of 186 people. Results of this study are expected later this year and, if favorable, could lead to a Food and Drug Administration approval before mid-2014. In mid-stage trials of the drug, drisapersen delivered a 117-foot improvement in six-minute walking distance over the placebo, but made no mention of the effect on dystrophin production.
In contrast, Sarepta Therapeutics Inc (NASDAQ:SRPT) is also developing a DMD drug known as eteplirsen, which not only improved walking distance but, in a much smaller 12-person mid-stage trial, actually demonstrated disease improvement. Based on trial results, eteplirsen was more impressive, but it also relies on the correlation that increase dystrophin production is what correlates to improved response by patients. The FDA has yet to make this correlation, which will likely put Sarepta and Prosensa Holding NV (NASDAQ:RNA) on a collision course in 2014 to have both their drugs going through the new drug approval process at the same time.
Drisapersen’s peak sales estimates of $600 million to $1 billionreally depend on whether it’s approved, whether eteplirsen is approved, and if it can successfully launch its product. With so many questions and few answers, I’d suggest abandoning ship and watching this one safely from the sidelines.
