3 Stocks Near 52-Week Highs Worth Selling

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

Even with the house of cards tumbling down on the housing sector yesterday, and the threat of the central bank purchasing fewer Treasuries and mortgage bonds, well over 200 companies still notched a new 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. Network equipment provider Cisco Systems (NASDAQ: CSCO  ) , for instance, dazzled Wall Street with another quarterly earnings beat last week. Cisco, even with the weakness of Europe weighing on its future, projected sales growth of 7% to 8% in 2013 as it continues to transition to cloud-based hardware.

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

The sun is setting on this company
I'm not quite sure how crazy you have to be to bet against a real estate investment trust in the red-hot housing sector, but apparently I'm there! Sun Communities (NYSE: SUI  ) is an owner of manufactured housing communities primarily in the Midwest, South, and Southeastern U.S. As a REIT, it's required to pay out at least 90% of its profits as a dividend to shareholders. Between the economic rebound and Sun's 5.5% yield, shareholders have enjoyed a nice ride since the bottom. Furthermore, Sun's funds from operations forecast for 2013 of $3.45 to $3.55 per share was ahead of the $3.38 consensus.

Yet I feel there are plenty of reasons to jump ship right here. The biggest concern I have with owning a manufactured housing REIT would be that low rates would either tempt prospective homebuyers into purchasing a house or keep them in their apartments and saving up for a home. Manufactured homes are sort of in a middle ground until lending rates begin to rise, which, I feel, will crimp Sun's growth opportunities from an organic basis in the interim.

Also, even with its impressive cash flow, Sun's $1.23 billion in net debt would cause me to sleep poorly at night. Sun's business model, at least at the moment, necessitates it continue to make acquisitions in order to spur FFO growth. Unfortunately, these acquisitions are only going to further drive up its debt levels. With Sun at roughly 13 times projected FFO, shareholders are left with very little room for error.

If you've got an issue, stay away from this tissue
The paper business is far from exciting, but sometimes the least exciting businesses make for the best long-term investments. However, tissue, paperboard, and pulp producer Clearwater Paper (NYSE: CLW  ) is not on that list -- at least for me!

Clearwater Paper reported its fourth-quarter earnings last night and, while surpassing EPS estimates by $0.08, it fell short on revenue estimates by $5.4 million. Cost synergies from its purchase of Cellu Tissue helped reduce its total expenses, yet overall net selling prices of its non-retail tissue, as well as its paperboard and pulp, fell from the previous year.

This leads me to the first reason I dislike Clearwater Paper: its valuation. Clearwater's total cash position is now below $33 million as long-term debt still remains near $524 million. Also, Clearwater is valued at a forward P/E (12.6) that's nearly twice as high as its projected 2013 growth rate (6.7%). That might appear cheap, but it's a steep price to pay for a slow-growth business.

The other factor to consider here is the underlying cost of paper (i.e., wood) could head higher given that housing inventories around the country are down dramatically. With fewer homes on the market, homebuilders will be incentivized to build faster, which could drop wood availability and boost prices across the board. This uncertainty is enough to keep me far away from most paper products companies -- especially Clearwater.

Don't get decked
Not to continue to pick on the housing sector and its various suppliers, but what on earth are investors thinking when it comes to wood-alternative deck and railing supplier Trex (NYSE: TREX  ) ? Trex shares have benefited from a rebound in the housing market spurred by low lending rates. In its most recent quarter, reported Tuesday, revenue fell 10% as its quarterly loss shrank to "just" $0.22 per share from $1.18 in the year-ago period. 

I could definitely support a small rally behind results that are "less bad," but to justify an eight-year share-price high when Trex has lost money in five of the past six years is sheer lunacy!

Take, for example, Toll Brothers' (NYSE: TOL  ) results yesterday, which highlighted a very sizable EPS and revenue miss. Although contracts signed went up 49% -- a pretty consistent trend among most homebuilders -- Toll's luxury home selling price actually fell 2% for the full year. If anything, this demonstrates that hiccups still exist in certain aspects of the housing market and that products suppliers still losing money should be tread around with extreme caution.

Trex is valued at about double its price-to-sales level from 2005-2006, when its share price was below where it is now, and when the company was profitable! Until Trex is consistently profitable, I think you'd be crazy to chase this stock higher.

Foolish roundup
This week was all about exposing weakness in the housing and housing products supply sector. While things have improved, there are still plenty of hiccups left to be uncovered.

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?

Is this the best value in the tech landscape?
Once a high-flying tech darling, Cisco is now on the radar of value-oriented dividend lovers. Get the lowdown on the routing juggernaut in The Motley Fool's premium report. Our report also has you covered with a full year of free analyst updates to keep you informed as its story changes, so click here now to read more.

Read/Post Comments (1) | Recommend This Article (4)

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 April 29, 2013, at 1:52 AM, DrGoldin wrote:

    Bit of a late response here, but Trex is expected to report earnings of at least $1 per share this week. If those results come in as expected, we're no longer dealing with a consistent loser.

    Don't get me wrong--I'm not buying Trex yet either. But a forward p/e of 17-ish is not insane.

Add your comment.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2268600, ~/Articles/ArticleHandler.aspx, 9/26/2016 8:26:04 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 2 days ago Sponsored by:
DOW 18,261.45 -131.01 -0.71%
S&P 500 2,164.69 -12.49 -0.57%
NASD 5,305.75 -33.78 -0.63%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/23/2016 4:02 PM
CLW $63.26 Down -0.47 -0.74%
Clearwater Paper CAPS Rating: ****
SUI $80.77 Up +1.13 +1.42%
Sun Communities CAPS Rating: ****
TREX $58.55 Down -0.01 -0.02%
Trex CAPS Rating: *****
CSCO $31.34 Down -0.32 -1.01%
Cisco Systems CAPS Rating: ****
TOL $29.19 Down -0.03 -0.10%
Toll Brothers CAPS Rating: ***