3 Stocks Near 52-Week Highs Worth Selling

Do you ever get the feeling that bulls outnumber the bears by a wide margin? Greek one-year bonds touched a yield of 139% earlier in the week, and yet dozens of companies are nearing new 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. Shareholders of ONEOK Partners (NYSE: OKS  ) have every reason to smile as their company has handily surpassed earnings expectations over the past four quarters. Now yielding north of 5%, this stock has all the potential to run higher and pay out a hefty sum of dividend income.

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

Customers, at any price
I’m not purposely trying to pick on every triple-digit P/E company in existence, but the valuation at athenahealth (Nasdaq: ATHN  ) could be due for a check-up.

As Foolish colleague Dan Caplinger pointed out a few weeks ago, athenahealth differs greatly from medical record and billing solution rivals McKesson (NYSE: MCK  ) and Allscripts Healthcare (Nasdaq: MDRX  ) in that it focuses on obtaining greater market share rather than large contracts -- even at the expense of its own margins. While this has translated into strong revenue growth over the past few years, it could be setting up for disappointment in the future. With considerably lower margins than its peers and valued at a staggering 47 times cash flow, it wouldn’t take much of a business slowdown to crush this high-flying stock.

Running on empty
Making money from low-margin fuel has always been a tough business -- just ask shareholders of Casey’s General Stores (Nasdaq: CASY  ) . Casey, which operates gas stations and convenience stores throughout the Midwest, reported results last week which showed double-digit revenue growth but raised more yellow flags than anything.

Its first-quarter report was soured by two key figures, as I see it. First, the company fell short of Wall Street’s expectations for the second time in the past four quarters. The company blamed rising expenses and weak gasoline sales as the reason for the earnings shortfall. Perhaps even more worrisome, gross margins fell for the fifth consecutive quarter over the year-ago period. This, more than anything else, explains why Casey’s earnings figures aren’t up to par. Until Casey can reverse its declining gross margin trend, I’d recommend driving right by this stock.

Aisle pass, thank you!
Hopefully I don’t go under the community guillotine for this, but what are people actually seeing in PriceSmart (Nasdaq: PSMT  ) ? The company, which runs warehouse-styled stores in San Diego and around the world, maintains net margins that put competitor BJ’s Wholesale to shame. But, I would hardly call a 3.8% net margin a reason to celebrate.

The company appears priced for perfection at 26 times forward earnings and a whopping 29 times cash flow. While I know I’d be giving up growth and even a net margin advantage, I’d easily choose Wal-Mart (NYSE: WMT  ) as the safer investment between the two. Wal-Mart, at only eight times cash flow and 11 times forward earnings, represents a stark value when compared to PriceSmart. Furthermore, at 2.8%, Wal-Mart’s dividend yield is more than three times that of PriceSmart.

Foolish roundup
It’s not often three sell recommendations stem from three companies growing by double-digits, but that was exactly the case this week. Keeping an eye on sector comparisons and margin rates can often give us clues as to whether a company is being set up for long term success or simply a flash in the pan move higher.

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 Wal-Mart. Motley Fool newsletter services have recommended buying shares of Wal-Mart, McKesson, and ONEOK Partners, as well as creating a diagonal call position in Wal-Mart. 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.


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  • Report this Comment On September 16, 2011, at 10:23 AM, prginww wrote:

    If you do not even know if a company has stores in the US or not, how can you say if what you shoul ddo with the stock. PriceSmart does not have any stores in the US. They are all located in the Caribbean and Central America. Secondly, they are opening stores in countries that have no other club presence. Choose Walmart, a company that is getting lots of pressure from Target.

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