3 Stocks Near 52-Week Highs Worth Selling

Market indexes are in danger of falling for their sixth consecutive week, but there's still no shortage of companies trading within reach of their 52-week highs. For optimists, these rallies may seem like a dream come true. For skeptics like me, they're opportunities to see whether companies trading near their 52-week highs have actually earned their current valuations.

Keep in mind that some companies deserve their lofty prices. Shareholders of Temple-Inland (NYSE: TIN  ) have reason to be excited following a $30.60 per-share hostile-takeover offer from International Paper (NYSE: IP  ) earlier in the week. Large-cap stocks have plenty of cash on hand right now, and many appear attractively priced, so consolidation may be the name of the game in the near future.

Still, some companies might deserve a kick in the pants. Here's a look at three companies that could be worth selling.

Cash and burn
Shares of Ariad Pharmaceuticals (Nasdaq: ARIA  ) have rallied roughly 20% this week to a new 52-week high, on news that its experimental cancer treatment, ridaforolimus (just rolls off the tongue, doesn't it?), extended the benefits of chemotherapy treatments in patients with bone and soft tissue cancers. Neither Ariad nor marketing partner Merck (NYSE: MRK  ) has given any details about what percentage of royalty Ariad can expect to receive if the drug finds its way to the market, but investors are already placing huge bets on its success -- perhaps blindly.

Aside from receiving a $50 million payment from Merck last year, Ariad has been unprofitable since its founding. The company has only $98 million in cash remaining on its books, and based on its loss estimates through 2012, it will probably suffer more than $120 million in losses over the next two years. At almost 24 times book value, shares have lost most of their pizzazz in my eyes.

The sweet smell of overvaluation?
Recent earnings data from Ulta Salon (Nasdaq: ULTA  ) paints a pretty picture for current shareholders of the company. Its earnings beat marked the 10th consecutive quarter that Ulta has come in well ahead of analysts' projections. But I feel investors would be small-f foolish to overlook obvious bearish trends in the closely followed retail sector.

Ulta sells 21,000 different cosmetic, fragrance, and beauty supply products throughout its network of almost 400 stores. But with many women curbing their spending in light of the economic downturn, I'm worried about how much longer Ulta can keep up this tremendous growth. Data from Talbots (NYSE: TLB  ) and Coldwater Creek has suggested that spending at women's retailers is poised to remain weak for the foreseeable future, which could portend bad news for Ulta's primary customer base. At almost 28 times forward earnings, this company needs plenty of foundation to hide its lofty valuation.

Gaming overload
Following a greater-than-400% run over the past six months, now may be the time to hit the game-over button on Majesco Entertainment's (Nasdaq: COOL  ) stock.

The video game publisher has been on fire of late, kicking out earnings results far and away above its historical average -- but that's also a reason to be increasingly cautious. Majestic's erratic earnings history is cause for concern in a video game sector which appears to have plenty of cheaper alternatives. Consider last week that I proposed looking further into Mad Catz Interactive, a company with a trailing P/E of 10 that trades at a price-to-sales ratio of 0.55. Compare that to Majestic's trailing P/E of 70 and its current price-to-sales ratio of 1.6, and you can see why it may be time to let Majestic go.

Foolish roundup
This week's lesson is that even in a down market, stocks can still go up for what might seem like irrational reasons. Paying attention to companies that are reporting earnings which are outside of their historical norms, or their sector's norms, can be a waving yellow flag that signals potential problems down the road.

What's your take on these stocks? Are they sells or belles? State your case in the comment section below and consider adding Ariad Pharmaceuticals, Ulta Salon, and Majesco Entertainment to our free watchlist service in order to keep up on the latest news in those sectors.

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. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policythat never needs to be sold short.


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