3 Stocks Near 52-Week Highs Worth Selling

Apparently 200-point intraday swings are becoming the norm. These volatile swings are leading not only to a run on Pepto-Bismol, but also to a surprisingly steady stream of stocks approaching 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 valuations. The thought of an online stamp company might seem ludicrous considering the proliferation of digital communication these days, but don't tell that to Stamps.com (Nasdaq: STMP  ) shareholders. The company practically doubled analysts' profit expectations last quarter while reporting a 26% jump in revenue.

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

A diamond looking rough
You would think that Diamond Foods (Nasdaq: DMND  ) has struck gold considering the huge gains the stock has seen since it announced its purchase of the Pringles brand from Procter & Gamble (NYSE: PG  ) for $2.35 billion (including debt) back in April. While this does look like a good deal for Diamond Foods on paper, the valuation of the company might be cause for concern.

When fully integrated, Diamond Foods' revenue will double or even triple because of the Pringles deal -- but growth figures might smack of mediocrity when the initial euphoria of this deal wears off. Slated to see profits grow at 16.5% over the next five years and with a forward earnings multiple of 25, there's very little value left in this stock. To top it off, Diamond's piggy bank is feeling drained after its Pringles purchase, with debt-to-equity chiming in at a stratospheric 127%. Time to pass the chips ...

It's all in the electrons
Not to be confused with the latest craze from your local DJ, NVE's (Nasdaq: NVEC  ) spintronics technology uses nanotechnology to acquire, store, and transmit information using electron movement. This is actually a very innovative process which has led to decent profits, but also plenty of ups and downs. The downside of innovation, as shareholders may learn, is always the customer base.

In all fairness, NVE is a small company of a few dozen employees, but its growth rates don't seem to justify its current valuation. Revenue growth in its latest quarter of 13% seems healthy, but my concern stems from the company's third earnings miss in the past four quarters. To add to this, NVE is valued at nearly 10 times sales and more than four times book value. Instead of NVE, I'd suggest looking into rival Analog Devices (NYSE: ADI  ) , which offers a considerably lower earnings multiple and stronger cash position.

Clinical insanity
One of the hardest sectors to understand as a value investor is the biotechnology sector. Keeping an abstract and objective view can be hard, but it gets even harder when companies like Ligand Pharmaceuticals (Nasdaq: LGND  ) ascend to new highs. Engaged in late-stage clinical trials and the acquisition of royalty-generating assets, Ligand simply hasn't shown adequate enough growth to justify its current valuation.

The company's phase 3 results for its hepatitis C drug Promacta do show promise. It was developed in partnership with GlaxoSmithKline (NYSE: GSK  ) . However, rising expenses could be this company's downfall. Guidance does call for Ligand to be cash-flow positive by the year's end, but earnings estimates for next year have been falling rapidly of late. While I try my best not to value a biotech company like every other company, it's a bit hard to ignore a valuation at 93 times forward earnings, 22 times book value, and 13 times sales figures.

Foolish roundup
This week, it's all about valuation. While all three of these companies are growing, cheaper alternatives exist in their sectors. Don't get stuck with the dead weight of a bloated stock, especially in a volatile market.

What's your take on these companies? Are they sells or belles? Tell us your thoughts in the comments section below and consider adding Diamond Foods, NVE, and Ligand Pharmaceuticals to your watchlist.

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. The Motley Fool owns shares of GlaxoSmithKline. Motley Fool newsletter services have recommended buying shares of GlaxoSmithKline and Procter & Gamble. Try any of our Foolish newsletter services free 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 policy that never needs to be sold short.


Read/Post Comments (3) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 02, 2011, at 5:59 PM, tim8rolls wrote:

    Dear Motley Fool: SELL STAMPS.com - read between the lines of their financial statement! Last quarter, they took a one-time revenue credit of $2.2 million - lol - they also have been keeping insurance revenue that normally would go to the USPS. This company has no creativity whatsoever, no merger or acquistion plans and basically intends to charge its customers more for no reason other than to increase revenue! SELL SELL SELL SELL SELL -Tim

  • Report this Comment On September 07, 2011, at 5:28 PM, trayman wrote:

    It also states in their financials that the upcoming Photostamps windfall won't be as large as this last quarter due to the accounting change, but it will still add revenue and profit to the top and bottom lines over the previous method of accounting for retail point of sales for Photostamps.

    I think you should just cover and be done with it Tim. Your bashing is no longer (if it ever was) effective.

  • Report this Comment On September 16, 2011, at 10:38 AM, chopchop0 wrote:

    DMND just blew past estimate and added 12%+.

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Related Tickers

8/29/2014 3:59 PM
DMND $27.57 Up +0.03 +0.11%
Diamond Foods, Inc… CAPS Rating: ***
LGND $52.04 Up +0.08 +0.15%
Ligand Pharmaceuti… CAPS Rating: **
NVEC $69.00 Up +0.41 +0.60%
NVE Corp CAPS Rating: ****
ADI $51.12 Down -0.17 -0.33%
Analog Devices, In… CAPS Rating: ****
GSK $49.10 Up +0.23 +0.47%
GlaxoSmithKline CAPS Rating: ****
PG $83.11 Up +0.08 +0.10%
Procter & Gamble CAPS Rating: ****
STMP $33.58 Up +0.05 +0.15%
Stamps.com, Inc. CAPS Rating: ***

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