3 Stocks Near 52-Week Highs Worth Selling

We may not be better off than we were five years ago, but the investors don't seem to care as the market continues to march higher. 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. ARM Holdings (NASDAQ: ARMH  ) , for example, appears well-deserving of a new 52-week high after posting a 19% increase in sales and a 28% increase in year-over-year profits for the fourth-quarter. Furthermore, ARM's first-quarter forecast was ahead of Wall Street's expectations and management also proposed a 35% dividend increase. Game-set-match, ARM!

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

Lofty expectations
I freely admit there are a few retailers I've never come around to -- Pier 1 Imports (NYSE: PIR  ) is one of those retailers. Pier 1 has been a big beneficiary from the recent surge in new home sales as new homeowners are turning to the discount store for good deals on home furnishings and accessories. However, I have my own reasons to believe that investors may be getting way ahead of themselves here.

To start with, the housing rebound is really only a few months old, so to assume that it can continue at such a rapid pace with the payroll tax taking around $1,000 out of the average taxpayer's pockets per year is a foolish assumption. Second, same-store sales growth of 8.2% in December, while definitely commendable, is going to be extremely difficult to duplicate or beat next year. There are fewer great deals to be had in the housing market and disposable incomes are shrinking because of higher taxes for many Americans. Finally, Pier 1 is valued at a lofty 22 times cash flow, a level it hasn't seen regularly since 2005, the same year its stock began its multi-year descent from $20 to just $0.11 a few years later.

Unlike in 2009, I'd definitely say the worst is behind Pier 1, but I have a hard time recommending it as a buy anywhere above $15 with so many uncertainties still evident.

Cue the little elephants
I'll give office supply chain OfficeMax (NYSE: OMX  ) credit for some very entertaining commercials depicting small rhinos and elephants, but that won't be enough to distract me from the fact that it's a poor choice for an investment.

OfficeMax has doubled since it announced the extinguishment of $871.5 million in non-recourse debt related to notes backed by Lehman Brothers, which became null and void when Lehman went bankrupt. The result was a far less indebted OfficeMax that glimmered with a one-time profit on its books. But, I'd advise those who've been lucky enough to enjoy the ride to come down from the perch quickly. OfficeMax's sales are projected to contract 2% this year and be flat next year as it closes underperforming stores and attempts to realign its focus toward traffic-driving mobile devices.

The problem with this plan is that Staples (NASDAQ: SPLS  ) , my clear favorite in the office supply sector, beat OfficeMax to the punch by a good year. Staples made plans to reduce its square footage and focus on mobile long before OfficeMax, giving it a better chance at capturing traffic in a highly competitive market. Staples also offers investors much better overall value at just 9.5 times forward earnings and with a yield of 3.3%. OfficeMax shareholders will pay more than 13 times forward earnings for essentially flat growth with a yield of just 0.7%. Thanks, but no thanks, OfficeMax -- you can keep your mini elephants!

Where's the beef?
My kudos and congratulations to staffing company Kforce (NASDAQ: KFRC  ) for trouncing Wall Street's expectations in the fourth-quarter, but where's the beef behind these numbers?

For the quarter, Kforce reported $269.8 million in revenue and a profit of $0.24. Expectations had only called for the company to earn $0.22 on $267.6 million in revenue. However, revenue fell by 5.5% year-over-year and adjusted GAAP earnings sank by 15% -- hardly a reason for the share price to explode higher by double-digits as my Foolish colleague Travis Hoium so astutely pointed out. Even Kforce's first-quarter forecast of $268 million to $274 million in revenue and a profit of $0.09-$0.12 failed to meet the current consensus of $275.5 million in revenue and $0.14 in EPS.

Staffing companies have been basically battening down the hatches and utilizing share repurchases and cost-cutting tools to artificially boost EPS, and Kforce is no different. On one hand, it is doing what it can to enhance shareholder value through buybacks and a special dividend, but all it's really doing is masking the fact that enterprises aren't hiring much, if at all, and that's bad news for staffing companies like Kforce with shrinking prospects. The risks simply outweigh the rewards with this company.

Foolish roundup
This week it's all about innovation and differentiation -- something I'm inferring none of these three companies possess. Pier 1's close ties to the housing sector and economy, as well as OfficeMax and Kforce's lack of sales growth, make these three stocks portfolio liabilities with far too much risk for my own taste.

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?

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  • Report this Comment On February 07, 2013, at 12:44 PM, inor35 wrote:

    good article with a question you recommending to buy ARMH at 23 x sales and 80 x pe ??

    if ARMH is growing at 30% it should sell at 30 x pe , whats your price target for ARMH ?

    intc sells for 1 x sales, AMZN - 2 x sales, BRCM - 2 x sales and NVDA - 2 x sales... even over valued CRM sells for 8 x sales

  • Report this Comment On February 08, 2013, at 10:39 AM, RickFoolAccount wrote:

    Yes exactly ARMH should sell at 30 it's already at 43. It's nice when an author misses a boat when he writes his article.

    All I could stand to read was his first part about Pier 1. His whole article contradicted himself. He says disposable incomes are shrinking because of taxes. That's true, that's more of a political statement then anything. The fact is its mostly shrinking for those that are also buying houses which is the same market that's GROWING!

    Really at the end he says himself the worst is behind Pier 1. He just feels the market is uncertain. If you can't figure interest rates couldn't go any lower lol. Well regardless it sounds, in the end, he just doesn't like shopping at Pier 1. Neither do I.

    Doesn't mean it's not a good choice over ARMH - LOL

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