3 Stocks Near 52-Week Highs Worth Selling

The new year has started off with a bang and plenty of what I would deem "unworthy" stocks are creeping up on 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 these companies have actually earned their current valuations.

Keep in mind that some companies do deserve their current valuations. Tech giant Google (Nasdaq: GOOG  ) deserves every bit of praise it has received of late for its game-changing Android and corporate initiatives. The company has had two straight huge quarterly beats. Valued at only 15 times forward earnings yet sporting a five-year expected growth rate of 19%, the stock is still cheap by my standards.

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

Powering down
As a former resident of California, I firmly recall when Edison International (NYSE: EIX  ) nearly collapsed under the weight of its debt and California's energy deregulation in 2001. Since that incident, I've never quite trusted the electrical powerhouse, despite the fact that it distributes electricity to nearly 14 million residents of the state.

The primary issue for me continues to remain Edison's debt load, which currently weighs in at $13.6 billion. With a debt-to-equity ratio of 113%, I'd want to see revenue growth of more than 3% per year if I were to take a flier on this stock. On top of this, according to estimates on Yahoo! Finance, Edison's profits are expected to fall in 2012 by 12%. In my eyes Edison will always be that struggling utility that will never regain its former glory. I'd suggest looking elsewhere for an income-producing utility.

It don't mean a thing if you ain't got that... profit!
Shares of RAM Energy Resources (NYSE: RAM  ) have been on fire over the past two weeks (to put it mildly). The stock has climbed 179% following news that former Petrohawk CEO Floyd Wilson and his company, Halcon Resources, are going to invest $550 million in RAM. Although I'm not from Missouri, I'm always about the "Show Me" state -- and RAM isn't showing me enough to support this valuation.

For one, RAM is expected to bring 200 million shares to market to close the $550 million investment, which could mean heavy dilution for shareholders at its current lofty price. Secondly, estimates of RAM's revenue are heading in the wrong direction -- not exactly something to take lightly when faced with a forward P/E of 145 and a price-to-book of nearly 14. Until I see RAM's assets turned into tangible results, there's simply no reason for the hype.

Investing disconnection
Earlier in the week, I looked at South Korean mobile operator SK Telecom (NYSE: SKM  ) and labeled it a very cheap foreign telecom that also packs a solid dividend punch. On the flip side of the foreign telecom trade, we have Philippine Long Distance Telephone (NYSE: PHI  ) , which is trading in many respects at twice the valuation of SK Telecom and is starting to look like a perfect sell candidate.

Whereas SK Telecom has had a long run of increasing revenue over the past decade and trades at a forward multiple of just 7, Philippine Long Distance's revenue has been flat over the past three years and its operating margin has fallen sharply since 2007. Valued at more than 12 times forward earnings and a not-so-cheap six times book value, I'd gladly trade this one in for SK Telecom -- or just about any other large domestic carrier -- in a heartbeat.

Foolish roundup
This week, I offered three companies that, while profitable, aren't exactly leaders in their field, either due to excessive debt, unproven expectations, or a premium valuation relative to their peers. I'm so confident that these three will underperform the S&P 500 going forward that I'm going to make a CAPScall and add them to my CAPS portfolio. The question now: Would you do the same?

Share your thoughts in the comments section below and consider adding Edison International, RAM Energy Resources, and Philippine Long Distance to your free and personalized watchlist to keep up on the latest news with each company.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He assures you no Californians or Missourians were harmed in the writing of this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of Google. Motley Fool newsletter services have recommended buying shares of Google and Philippine Long Distance Telephone. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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 (13) | 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 January 05, 2012, at 3:44 PM, Teacherman1 wrote:

    I agree that RAM has not yet "earned" it's "price spike", but I would not necessarily have to wait for it to attain profitability to see it as a reasonably good buy.

    Since the "new money" is basically coming in at $1.25 per share, and they will also get warrants at $1.50, I would be willing to pay about a 10% to 15% premium over their "buy in" price.

    So if when the new shares are issued, or the market overall takes a "schitzo" drop, I would look to take a starting position at about $1.65, and maybe up to $1.75.

    That would be a bet more on the reputation of Wilson than on what they have actually achieved, but I believe it would probably turn out to be a pretty good bet.

    JMO and worth exactly what I am charging for it.

  • Report this Comment On January 05, 2012, at 6:00 PM, RealityTrade1 wrote:

    With all due respect, the article misses the mark--and is perhaps designed to shore up short support in the short term. My guess is that shorts should be prepared to cover soon.

    Far from translating into a negative, the company plans in fact confirm commitment and bold initiative; and Floyd Wilson's integrity, experience, and work ethic are proven commodities in a world where such traits lack. Getting in at ground level pricing, a dollar or 2 more than original risk money by Wilson himself is an opportunity that does not materialize often in this business.

    I predict a continuing quick rise of a new strong energy company with excellent SH value.

    Over $5/sh soon...then we are really off.

    And that prediction is solid; the only question is precisely WHEN, and if I knew that I would be writing somewhere else for $!

  • Report this Comment On January 06, 2012, at 5:58 AM, fool1953 wrote:

    I think I agree with his comments on EIX. They have high debt and low growth. I believe the attraction of this stock is its dividend and the fact that the dividend is stable. The thing is its dividend is way low compared to the other utilities. It is around 3% while the other utilities are typically over 4%. On the positive side they are a stable company and they pay out a low percentage of their earning for the dividend.Plus they have increased their dividend for the past 8 years or so but they only do it by a small amount. I think they would be more fairly valued in the mid 30's.imho

  • Report this Comment On January 06, 2012, at 9:55 AM, mfosterla wrote:

    I spoke with Investment Relations at Halcon Resources which is the company purchasing RAM. They are planning on doing a 3 for 1 merge of the stock. So if three shares are trading at $3 will become one share of $9 What does that mean for the extra 200 million Shares.

  • Report this Comment On January 06, 2012, at 1:24 PM, Teacherman1 wrote:

    Don't mean to "butt in" on UltraLongs article, but here are my thoughts, for what they are worth.

    As far as the 200M shares are concerned it won't have an immediate affect, since they will simply have fewer shares outstanding at a higher price.

    The 200M shares was based on the $550M being injected. If the price of the shares is higher, it will be fewer shares.

    Where it will be of benefit to them (Halcon ) is the $1.50 warrants.

    The higher price will also likely give them access to more institutional investors.

    Taking the numbers I used in my previous post, I would just multiply them by 3 to get my new start price.

    One question is when does this 3 for 1 take place? Is it before or after Wilson et al, buys in?

    One clarification, Halcon Resources is not buying RAM, they have just committed to a capital injection via new share purchases.

    They will of course be running it, so I guess one could view it as "buying them".

    Hopefully UltraLong will post his thoughts on this.

    I expect all of this to have eventual positive results for RAM, but like always, my position is that you make your money when you buy, not when you sell; so getting in at the right price is important.

    JMO and worth exactly what I am charging for it.

  • Report this Comment On January 06, 2012, at 3:32 PM, mfosterla wrote:

    When I spoke with him he said they were shooting for early next February. I think articles like this without all the facts are misleading to investors.

  • Report this Comment On January 06, 2012, at 3:46 PM, mfosterla wrote:

    He said they were shooting for early next February

  • Report this Comment On January 06, 2012, at 5:06 PM, Teacherman1 wrote:

    Ok. Need to look at this again. Not quite as straight forward as it first appeared.

    It's 220M shares being issued for $275M to Halcon, then there would be a $275M convertible 5 year note, and then 110M warrants at $1.50.

    From what you reported mfosteria (from your conversation with Investor Relations) there would then be, at some time in the future (next Ferruary), not this February?, a 3 for 1 reversal.

    If this is the way it is going down, then it looks like Halcon is getting about 75% of the then outstanding stock at $1.25 per share. This would result in immediate dillution to the current share holders, but would give the company the working capital and expertise they need to go forward.

    I agree that more information is needed to see what a good starting price would be.

    Hopefully RAM's management will give a little more guidance and more details on what is happening when.

    Will be interesting to see how it plays out.

  • Report this Comment On January 06, 2012, at 8:05 PM, RealityTrade1 wrote:

    Obviously some astute people tracking this deal. Thanks for the analysis.

    I tend to overemphasize concepts of market psychology and management reliability. They are reality to me.

    But, as the other comments point out, such things must always be balanced against objective numbers and present criteria. Thanks for the reminder.

    In this case, I am not sure where the present balance will fixate. But I am more certain than I have been in a long time that the reliability of the people about to take the helm is indisputable (confirmed in the price surge even to this point). Once word spreads beyond the familiar followers, the psychology of the larger market should advance the stock further. Longer-term prospects for actual operational success going forward should provide additional support. Again, the reliability of incoming management is a proven commodity. Thats always been the primary catalyst for me to take on risk. We'll see if it pans out here.....

    P.S. I rarely write on these sites, but I am excited about Halcon (as if its not evident), and what they bring to the game in terms of history, experience and credibility. I am in. I hope they can pull it off.

  • Report this Comment On January 07, 2012, at 12:09 PM, Teacherman1 wrote:

    There is a "chock full of information" SEC filing on the RAMs website. It is long, detailed, and not quite clear on timing, but worth the time to read.

    My take away at this time is, it might be better to wait until they issued the new shares, get the cash from the note, and make the "total" management and board change to see where it is.

    Even if it shoots up immediately, it will likely come back down some on the dilution, because it will take some time for the "new" company to get up and running.

    They have a "proforma" balance sheet to show what it will look like immediately after the transaction, but there is a lot of information there to take in without a detailed analysis.

    I believe this will be positive going forward, but it is hard to tell how soon that positive movement will have a longer term effect on the share price.

    It will basically be a new company, with some residual properties at the core.

    Again, not as simple as it first appeared.

    JMO and worth exactly what I am charging for it.

  • Report this Comment On January 08, 2012, at 9:48 PM, mfosterla wrote:

    Ram is Supposed to be changing its name to Halcon Resources, according to this article http://www.reuters.com/article/2011/12/22/ramenergy-idUSL3E7...

    What will become of its ticker symbol?

  • Report this Comment On January 09, 2012, at 1:23 PM, mfosterla wrote:

    Bad call on RAM... up 15% today

  • Report this Comment On January 10, 2012, at 12:11 PM, mfosterla wrote:

    RAM Energy Resources (NYSE: RAM) is now covered by analysts at BMO Capital Markets. The analysts set an “outperform” rating on the stock.

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