3 Stocks Near 52-Week Highs Worth Selling

Protests in Greece and Spain dipped the market, but hardly enough to make a sizable difference in the vast amounts of stocks trading near a 52-week high. For skeptics like me, that's an opportunity to see whether companies have earned their current valuations.

Keep in mind that some companies deserve their current valuations. Regional bank Hudson City Bancorp (Nasdaq: HCBK  ) continues to trickle higher following a $3.7 billion buyout offer from M&T Bank. The deal should immediately add to M&T's earnings and is a nice boost for Hudson City shareholders, who've seen their stock struggle since the recession.

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

A daily double
We're not on Jeopardy!, but Alex, I'm going to start us off with a daily double on Comcast (Nasdaq: CMCSA  ) (Nasdaq: CMCSK  ) . "What's the difference between the two classes of shares?" you ask? CMCSA shares allow for voting rights while CMCSK shareholders get no voting rights -- that's the only difference.

Comcast shares are nearing an all-time high, having taken advantage of miscues from DISH Network, which is currently in a legal battle with AMC Networks over a failed programming deal. Comcast has been aggressively adding high-speed subscribers and pushing its high-margin digital TV platforms with moderate success.

Why I'm negative on Comcast here has to do with its valuation relative to its peers, the likelihood that its peers will adjust to regain lost market share, and consumers' overall opinion of the business. I'm fully aware that AT&T and Verizon offer significantly more diversified products than Comcast, but I'm simply unwilling to pay 16 times forward earnings for a company that'll likely grow in the low-to-mid single digits organically. Second, I don't see how DISH, DIRECTV, or even Internet streaming companies are going to allow Comcast to dominate the pay-for-TV market. DISH's unique and short-term problems are really giving Comcast its biggest boost at the moment. Finally, I don't think there's a more universally disliked company by consumers than Comcast. Word of mouth can be your friend or your enemy, and I just don't see Comcast outperforming from here with such negative sentiment surrounding its service.

Tongue and chic
I recall reading, near the end of August, an Associated Press article on a key metric rising for retailer American Apparel (NYSE: APP  ) and thinking that the only metric that should be rising there is the potential for an abrupt reversal of fortune. Since reporting a 24% increase in year-over-year same-store sales, American Apparel's stock has tacked on about 55%, and I'm as negative as ever on the teen-focused clothing company.

American Apparel's CEO, Dov Charney, noted strength across all major market segments, but also pointed to the need for tighter inventory management and store renovations that are needed to drive sales. I'd like to counter with the fact that American Apparel has never done a particularly good job at managing its inventory levels and has relied on heavy discounting to move its merchandise. In addition, consumer spending is falling, which is hurting some of its closest competitors, like Aeropostale. Finally, how American Apparel expects to renovate its stores and complete the construction of its distribution center with a current cash balance of less than $8 million is beyond me.

I don't make such predictions lightly, but as it's been cash flow positive in only one of the past five years, it seems to me that American Apparel's prospects are sinking quickly.

Growth with an asterisk
"When in doubt, buy them out" should be the new motto at Roper Industries (NYSE: ROP  ) , an instrumentation company that makes products ranging from energy systems and controls to scientific imaging products and software.

Roper has already made four acquisitions in 2012, most recently purchasing privately held Sunquest Information Systems for $1.415 billion. The acquisition, according to Roper, should add $140 million in EBITDA next year. Now let me share why I think now is a good time to hit the exits.

Let's start with Roper's second-quarter results, which demonstrated just a 3.5% increase in revenue. Of that increase, organic growth (stripped of acquisitions) was a meager 3%. Considering that Roper is valued at 19 times forward earnings, that means investors are willing to pay more than six times the organic growth rate for Roper's business! To me, that's a very rich valuation. Finally, while the company does have $519 million in cash, and a $1.5 billion credit facility, at some point it's going to need to show Wall Street it can be more than just a company that acquires things. I'm not impressed to say the least.

Foolish roundup
This week's theme is about pointing out growth with an asterisk. Comcast has shown some genuine strength, but I attribute that mainly to DISH Network's shortcomings. Roper and American Apparel, on the other hand, have little organic growth, or basically none at all, in American Apparel's case.

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?

American Apparel might be a complete mess, but our analysts at Motley Fool Stock Advisor recently identified three retail stocks ready to rule the roost. Find out the identity of these retail game-changers by clicking here and getting your copy of this latest special report, for free!

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.

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.


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  • Report this Comment On October 02, 2012, at 12:12 PM, Buysider wrote:

    Your opinion of Roper Industries (ROP – 109.23) seems to be different from that of your colleague, Lee Samaha, the author of "The Best Run Company in America," The Mötley Fool, September 17, 2012 (about Roper).

    Roper's sales, earnings, EPS, and stock price have grown at better than 20% a year for the past 19 years, beginning with FY October 1992, which was the first fiscal year following Roper’s February 1992 IPO at a split-adjusted price of $1.875 a share. The stock price is up 58.3 times in the 20 years since Roper’s IPO, or a compound annual growth rate (CAGR) of 22.5%. Sales in calendar 2011 (Roper shifted to a calendar year from an October fiscal year in 2003) were $2.8 billion, up from $70 million in FY October 1992, up 40 times in 19 years, or a CAGR of 21.4%. Net income in calendar 2011 was $427 million, up from $4.7 million in FY October 1992, up 91 times in 19 years, or a CAGR of 26.8%. EPS in calendar 2011 was $4.34, up 47 times from a split-adjusted $0.0925 in FY October 1992, or a CAGR of 22.5%. Roper’s stock price has gone up at exactly the same rate as its EPS, which is what one would expect.

    Over that span, Roper's organic growth rate has hovered in the 6-to-8% range, with the remainder of the growth coming from buying very profitable, very-high-cash-flow companies that dominate niche businesses for reasonable-to-low acquisition prices, with the additional sales and resulting accretion bringing Roper's sales and earnings growth rate to better than 20%.

    Roper’s acquisition of Sunquest is of the same genre, and will help keep Roper's high growth going, as you will see during the next 12 months. The other 3 acquisitions this year are relatively small “bolt-on” purchases for existing businesses.

    Your comment "When in doubt, buy them out," seems inappropriate. Roper has some of the highest standards for making acquisitions you will find anywhere.

    Roper is at or near the top of the pile for industrial companies in gross margins, EBITDA margins, operating margins, net margins, incremental margins, free cash flow per share, working capital to sales, asset lightness (including capital expenditures per dollar of sales), return on invested capital, market share, market dominance, Lean practices, and almost any other metric you can think of. For comparisons with lesser companies, see the presentation slides from Roper's recent appearance at the Citi Global Markets Investor Conference at http://phx.corporate-ir.net/phoenix.zhtml?c=99690&p=irol.... For more details, see the slides from Roper’s July 30 2Q 2012 earnings call at that same web address.

    Far from being a "rich valuation," Roper's P/E is less than its 20% growth rate, or a PEG ratio of less than one.

    So you see, Roper has no need to "show Wall Street it can be more than just a company that acquires things." It's been DOING that for the past 20 years.

    I have followed the company closely on both the sell side and the buy side since Roper's IPO on February 12, 1992.

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