3 Stocks Near 52-Week Highs Worth Selling

Despite reeling from another disappointing jobs report and little intent from the Federal Reserve to propose further quantitative easing, about 1,500 stocks are still within 10% 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 have earned their current valuations.

Keep in mind that some companies deserve their current valuations. Wal-Mart (NYSE: WMT  ) is finding itself in the sweet spot once again with its U.S. operations growing and bargain-hungry consumers returning to its stores.

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

Better off dead
Some companies are better off left for dead, yet here I stand, looking at Iridium Communications (Nasdaq: IRDM  ) hitting a new 52-week high. The provider of cellular service across the entire globe through a network of 66 satellites went bankrupt in 2000 after spending billions to build and send its satellites into space and bringing in little revenue. Apparently, charging $7,000 for a phone and $7 per minute for service didn't fly with customers.

Fast-forwarding to the present: Iridium is back, purchased by a group of Chinese investors for literally pennies on the dollar ($25 million to be exact). Iridium is profitable and reliant on updates to its satellite network to drive growth. One update in particular, known as AxcessPoint, allows users to use their existing mobile devices to send emails and messages. However, I'm not going to forget how poorly this company was run in the past and still see few growth opportunities in the present.

Despite counting numerous airlines as customers, including Delta Air Lines (NYSE: DAL  ) , Iridium's network of satellites is archaic in technology years. With download speeds of 128 kbps from its 15-year-old fleet of satellites, customers aren't exactly champing at the bit to join. Iridium's plan is to spend $3 billion upgrading the network, but it still needs to raise an additional $1 billion in funding to reach this mark -- even though it only earned $39.7 million in fiscal 2011. Even worse, this update won't even occur until 2017! I'd suggesting dropping this call before it's too late.

Dis-count me out
My love affair with dollar stores is officially over. On more than one occasion, I've driven the gavel down on Dollar General based on its premium valuation and consumers' fickle spending habits. Today, it's time to add Family Dollar (NYSE: FDO  ) to the list of sell candidates.

Unlike Dollar General, Family Dollar does pay shareholders a dividend (currently equal to a 1.3% yield), which is a clear step up. The real reason Family Dollar joins the rest of its dollar brethren is that it, too, is priced for perfection.

Like all dollar stores, Family Dollar relies on consistent pricing strategies and aggressive marketing to bring bargain-driven consumers into its stores. However, dollar stores also market higher-end discretionary products that they need to sell in order to drive high-end margin expansion. If there's even the slightest hiccup in moving these higher-margin products, the dollar store sector will fall on hard times.

Last quarter, Family Dollar missed Wall Street's EPS estimates by $0.01, and we could be in for much of the same in the third quarter. The story that consumers are looking for bargains makes sense, but the valuation on these dollar stores flew out the window months ago.

To infinity and beyond
Every time I hear SciQuest's (Nasdaq: SQI  ) name, I instantly think of spaceships and cheesy mid-1990s science fiction movies. Although the company does nothing that relates to space travel -- it's a source-to-settle supply chain services company -- it does have a valuation that's floating into the upper atmosphere.

To comfort the naysayers who steadfastly stand behind SciQuest's premium valuation, I will concede that it's profitable and expected to grow at 18% in fiscal 2012 and 21% next year, according to Wall Street's projections. But does that justify a trailing P/E of 157? I hardly think so.

SciQuest gets on my naughty list by providing its employees with tons of income-diluting stock-based compensation. For the year, SciQuest anticipates paying out a whopping $5.5 million in such awards, which is the reason that, despite growing sales by 15% in the first quarter, EPS actually fell! Because of these expenses and an increase in operating expenses generally in line with sales growth, SciQuest is valued at 44 times next year's earnings. It would take some serious belt tightening and operational cost controls before I'd take my underperform rating off SciQuest.

Foolish roundup
I call this week's segment "Coming back to Earth." All three companies we've looked at are priced for perfection yet exhibit notable flaws that should knock them off their perch.

I'm so confident in my three calls that I plan to make a CAPScall of underperform on each one. The question is: Would you do the same?

Share your thoughts in the comments section below, and to avoid investing in stocks like these, consider getting a copy of our special report: "The Motley Fool's Top Stock for 2012." In it, our chief investment officer details a play he dubbed the "Costco of Latin America." Best of all, this report is free for a limited time, so don't miss out!

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, 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 Iridium Communications and Costco. Motley Fool newsletter services have recommended buying shares of Costco and creating a bull call spread in Wal-Mart. 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 (3) | Recommend This Article (2)

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 July 14, 2012, at 10:03 AM, DavesHere wrote:

    Iridium was poorly run in the past by the company from whom its assets were purchased. How does that relate to the present? And making satellite (uninterrupted communication) technology, via card, available for cell phone (presently tower dependent) hand-sets is not an opportunity for growth? The logic (other than gravity, which does not always apply in investing) behind the pessimism is difficult to follow.

  • Report this Comment On July 16, 2012, at 4:28 PM, LizDeCastro1 wrote:

    Hello. Sean Williams’ July 12 post, “3 Stocks Near 52-Week Highs Worth Selling,” includes inaccuracies that require correction. But first, while it may be important to understand where Iridium started, it is much more significant to consider where the company is today. In the last five years alone, Iridium has had a CAGR for service revenue and operational EBITDA of 15% and 24% respectively by expanding operations beyond the satellite-phone-only model initially developed for the company in the late 1990s. Leveraging the only communications network that is truly global – and expanding connectivity significantly further than the limited 10% of the world covered by terrestrial networks – Iridium is making great strides to connect people, industries and machines in ways never before thought possible.

    Iridium NEXT, our next generation satellite constellation, is on track and scheduled to begin launching in 2015. We’ve just announced what we anticipate to be a significant source of potential income for years to come by adding receivers to each of the satellites, with the potential to revolutionize air traffic management, (www.aireon.com). The post also mentions Iridium® AxcessPoint, which is just one piece of an overall handheld strategy rolled out last year (Iridium ForceSM) to bring connectivity to users wherever, whenever they want it. Meanwhile our market share in the maritime industry is growing significantly and Iridium-enabled advances in machine-to-machine communications have led it to be our fastest growing market segment.

    All of this is to say that Iridium today is far from the satellite phone company that went bankrupt more than a decade ago. A small group of farsighted investors – three Americans and three international investors from Australia, Brazil and Saudi Arabia – had a vision for the opportunities this network offered far beyond enabling phone calls. Since then, we have evolved to become a vital piece of the global communications infrastructure that enables innovation in multiple sectors through our network, our own products and those of our more than 275 service partners.

    @IridiumComm

  • Report this Comment On July 18, 2012, at 12:58 PM, fredslaw wrote:

    SCIQUEST---HUMMMMMMM not heard too much about them, other than poor products and horrible service. Ariba rocks compared

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