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3 Stocks Near 52-Week Highs Worth Selling

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You'd think that following four straight down days for the broad-market S&P 500 and a few speed bumps to begin earnings season we'd have fewer stocks near a new 52-week high; yet 42% of the Motley Fool CAPS database is still 10% or less from 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. Warehouse retailer Costco (Nasdaq: COST  ) crushed Wall Street's earnings expectations yesterday as net income climbed 29% and net sales rose 14%. These results pushed Costco shares to an all-time record-high.

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

Cbeyond these figures? Hardly...
What is up with nearly every networking company attempting to rebrand itself as a cloud-computing company these days? I'm fully aware that cloud-computing investments are spiking, but for an IT infrastructure company like Cbeyond (Nasdaq: CBEY  ) , it's going to take more than fancy wordplay to get me on board.

Cbeyond provides an array of services to U.S. small businesses, including broadband and voice, as well as cloud data center services. I wish that was a guaranteed formula for success, but a sea of red in the estimates column predicts continued losses for Cbeyond. In fact, Cbeyond has only been profitable in three of the past 10 years -- not a particularly strong track record.

Of greater concern to me than its track record would be its recent quarterly report, which highlights two worrisome trends. First, although its churn rate of 1.5% is low relative to its peers -- by comparison, Vonage (NYSE: VG  ) sports a churn rate that's 80% higher at 2.7% -- it rose by 20 basis points over the year-ago period. It's a trend worth watching. What's really disconcerting is that average revenue per user fell from $660 in the year-ago quarter to just $641 in the latest quarter. ARPU also fell $1 in sequential quarters. Simply put, with customer growth slowing and small business spending remaining tepid at best, Cbeyond can't acquire customers quickly enough to offset its falling ARPU. That's bad news and definitely a reason not to be buying here near a 52-week high.

Examine this!
Let's file this one under the "look closely" column, because independent medical exam and bill review company ExamWorks (NYSE: EXAM  ) seems to have pulled a fast one on investors.

Before I continue, let me clear up one point: ExamWorks has done nothing illegal and has completely disclosed all facets of its operations in its quarterly reports. But let's just say that the reverse of the usual admonition is true: Objects in the mirror may appear closer (and bigger) than they actually are.

What I'm specifically speaking to is that rapid growth rate ExamWorks sports on the surface. Revenue has ballooned from just $15 million in 2008 to an expected $483 million this year. But if you dig into ExamWorks' reports, you'll find that a lot of this growth tends to come from acquisitions and very little from actual organic growth. Backing out ExamWorks' recent acquisition, and excluding the impact of negative currency translations, the company's pro forma net revenue grew not by the top-line 19.8% you read immediately under the press release headline, but by a meager 1.7%. One-point-seven percent! That's it! In fact, ExamWorks points to organic growth of only 4%-6% in 2012. For a company that isn't even profitable and has costs rising at a matching pace to acquisition-included revenue growth I'm not impressed one bit.

What's black and blue and soon to be red all over?
I applaud what the newspaper industry is doing in order to drum up digital subscriptions, cut costs, promote advertisers to spend, and increase circulation -- but for the life of me I can't understand the buying interest in The New York Times (NYSE: NYT  ) at these levels.

The New York Times has done a good job at coercing readers into purchasing digital subscriptions by shrinking the amount of free online article views per month from 20 to 10. Yet other areas of its growth cycle are lacking severely.

To begin with, expenses fell 1% in its most recent quarter. Here's a newsflash for the entire publishing sector: You can't squeeze blood out of a turnip! These companies have been shaving costs for three-plus years; there's nothing left to be cut unless you continue to shelve employees. What it comes down to now is that The New York Times and its peers need to deliver actual growth beyond just cost-cutting, and it's just not there. At the moment, ad-sale weakness is more or less cancelling out all circulation growth. As long as global growth remains weak, there's probably little chance of an ad-sale rebound anytime soon. With 2012 on pace to be its seventh straight year of declining revenues, I feel 16 times forward earnings is a ludicrous price to pay for The New York Times.

Foolish roundup
It was subtle, but this week's theme was attacking one-star-ranked CAPS stocks. The CAPS system may not be perfect, but these three stocks look like a good shot to underperform according to the 180,000-plus member CAPS community, and now me.

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?

It's no secret that Costco's formula for success is working -- its share price is evidence of this. But Costco isn't the only company our analysts feel could rule the retail roost. Find out the identity of three stocks our analysts at Stock Advisor have handpicked as ruling the retail sector -- for free -- by clicking here to get your copy of this latest special report.

Fool contributor Sean Williams has no positions in the stocks mentioned above. The Motley Fool owns shares of Costco Wholesale. Motley Fool newsletter services recommend Costco Wholesale. 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.

Read/Post Comments (1) | 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 January 21, 2013, at 3:06 PM, peterspeter wrote:

    Mr. Sean Williams is most astute with his obsevations of ExamWorks of organic growth.

    Why ExamWorks has not demonstrated the ability to grow organically is simple to explain.

    ExamWorks was founded in 2008 with no experience in the IME and peer review field. Since

    that year it has purchased over 30 independent IME companies. Because ExamWorks had no

    established IME platform, infrastructure or universal IT platform there was no way to

    integrate the 30 IME acquisitions into one seamless business model. The acquisitions

    operate in many respects independently and in some regions actually compete for market

    share while sales has never been integrated on a national level. Add to that the fact

    that new IME companies are being formed to compete with ExamWorks in various regions and

    that customers are always looking for a choice in IME and peer review vendors and you

    have the making of a perfect storm for no organic growth. More disconcerting than lack

    of organic growth is ExamWorks inability to have ever made a profit in any quarter since

    its inception and it continues to have negative return on equity. How does one value a

    company with no organic growth, negative return on equity and no profit?

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12/31/1969 7:00 PM
CBEY.DL $0.00 Down +0.00 +0.00%
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EXAM $0.00 Down +0.00 +0.00%
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NYT $11.55 Down +0.00 +0.00%
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