3 Stocks Near 52-Week Highs Worth Selling

The broad-based S&P 500 may be about 3% from its all-time high, but that hasn't stopped nearly half of all companies in the Motley Fool CAPS database from rising to within 10% of a new 52-week high. For skeptics like me, that's an opportunity to see whether companies have earned their current valuations.

Here's a look at three companies that could be worth selling.

Rotten Kandi
This year has certainly been the year of going green, with anything solar or electric-vehicle-based shooting to the moon. The latest in a serious of rocket stocks is China's Kandi Technologies (NASDAQ: KNDI  ) , which has basically doubled in just the past two weeks following the Chinese government's approval of the company's first all-electric sedan. Given the success of Tesla Motors (NASDAQ: TSLA  ) in the U.S., many are suspecting that Kandi will be a surefire winner with Geely Automotive in its corner as a partner. As for me, I'm not as convinced.

The two companies are really nothing alike. Let's be clear that I firmly believe both are significantly overvalued at their current levels, but at least Tesla has the production capacity to hit a level (about 20,000 vehicles) where it can break even on an earnings basis. It's also led by Elon Musk, truly an innovative CEO, known for his ability to generate cash flow and bring new ideas to the table.

Kandi Technologies looks like nothing more than wishful thinking at this stage of the game with the company focused on producing a fleet of rental vehicles for the middle-income Chinese citizen, not the same high-end clientele that Tesla is after. Just yesterday shares soared on the announcement that it will manufacture 5,000 to 10,000 EVs initially in China. If Tesla serves as any reminder, glitches and manufacturing delays are common -- as are higher-than-forecast expenses. With EV production expected to cause expenses to soar, I wouldn't be surprised if Kandi burned through $10 million in free cash each quarter!

I fully understand the allure of EVs, but investors are a couple of years too early in buying into the concept, with the infrastructure and public understanding just not there.

Cannot compute valuation, error!
Ever since iRobot (NASDAQ: IRBT  ) -- a maker of robots for the government, industrial, and consumer sectors -- revamped its marketing campaign, its share price has been off to the races. If I didn't know any better, I'd say its Roomba vacuum is cleaning house of all short-sellers. However, if I've learned anything about iRobot over the years, it's that the company is completely susceptible to the normal peaks and troughs that affect the tech replacement cycle.

iRobot's most recent quarter was good and I certainly won't take anything away from its $0.12 EPS beat. But it should be understood that iRobot's beat came primarily from tighter expense controls rather than better sales and pricing. That could be a problem with a decent chunk of its revenue coming from the government. Most developed governments around the world are reducing their spending to curb high debt levels, which would bode poorly for iRobot's future orders.

The company's valuation is also a big concern. The problem with developing new technologies is that the R&D that goes into developing them, and the quickness with which they become comparatively obsolete, causes natural peaks and troughs in iRobot's bottom line. That's disconcerting, with iRobot valued at a lofty 36 times forward earnings. There's simply no amount of cleaning a Roomba can do to this valuation to make it appear attractive.

Priced for perfection
Software-as-a-service provider Demandware (NYSE: DWRE  ) certainly commands quite the premium valuation as enterprises transition from individual computer systems to software capable of integrating customers' information in the cloud on one Web-based platform. The beauty of such software designs is that they result in recurring revenue and regular upgrades.

The worry I have with Demandware, as I've stated in multiple instances before with SaaS companies, is that it could be years before expenses shrink enough, and organic growth is powerful enough, for the company to turn a profit. At the moment Demandware is well capitalized, with $102 million in net cash, but could burn through some of this cash as it increases its staff and R&D spending. With losses expected through 2014 and the company valued at 11 times book and 12 times sales, it's not exactly a value play by even the loosest interpretation.

The other concern, similar to iRobot's, is that government spending reductions could trickle down to enterprises, which, in turn, could quickly slow Demandware's growth rate. If Demandware has any shot of turning a profit, it'll need to pare down its spending and it'll need a pickup in enterprise spending that I just don't see happening.

Foolish roundup
This week it's all about keeping your expectations reasonable. In the case of Kandi, with its newly authorized EVs, iRobot, with its consumer-driven Roomba, and Demandware, with its single-platform software sales, the potential on paper is certainly there. However, from a valuation basis the chance of success seems pretty low over the interim.

I'm so confident that these three names will bounce off their lows that I'm going to make a CAPScall of outperform on each one.

Editor's note: A previous version of this article was mistakenly titled "3 Stocks Near 52-Week Lows Worth Buying." The Fool regrets the error.

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Read/Post Comments (10) | Recommend This Article (3)

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 June 18, 2013, at 10:26 AM, Tgar13 wrote:

    This is one of the most ill informed articles

    I have ever read! Oh Mötley Fool please get

    Some editorial handle on what is allowed to

    Be published! Kandi already had a 100k vehicle

    Capacity. Cap Ex investment isn't needed it is

    Mostly done for this phase of growth. With the

    Government subsidizing these rentals they

    Can be priced for a profit....with no cash burn.

    This is not a biotech startup!

  • Report this Comment On June 18, 2013, at 10:48 AM, Nolte808 wrote:

    I think the headline is meant to be stocks at highs worth selling

  • Report this Comment On June 18, 2013, at 11:09 AM, corant123 wrote:

    The roundup on this one made my head hurt. How we got from "the chance of success seems pretty low over the interim." to "I'm so confident that these three names will bounce off their lows that I'm going to make a CAPScall of outperform on each one." I'll never honestly understand. Almost the entire article talked about all the problems these three companies faced, for the final line to be an endorsement of them just really throws me for a loop.

  • Report this Comment On June 18, 2013, at 1:04 PM, captainccs wrote:

    The Kluelessness surrounding Kandi is Kolossal.

  • Report this Comment On June 18, 2013, at 2:48 PM, MontanaAnne wrote:

    I agree that the article is very poorly conceived. Am considering cancelling already, after renewing only a few weeks ago. There seems to be way too much fluff here.

  • Report this Comment On June 18, 2013, at 11:14 PM, Tgar13 wrote:

    Thanks for correcting the title but your facts on KNDI are wrong....they have a large capacity already and are already selling cars for a profit!

    The company is well positioned to be the major supplier of the biggest car share type rental program the world has ever seen

    China has no choice in developing a state run rental program for easily accessible short term EV rentals. This solves the dual plagues of urban traffic congestion and urban pollution.

    China has stated a goal of 5 million EV's by 2020

    Even a small portion of that given their current margins would lead to a PPS of 80 to 120 dollars.

    I would recommend scaling in with a small portion of investable money and adding aggressively on pullbacks!

  • Report this Comment On June 19, 2013, at 12:35 AM, antikoolaid wrote:

    Tgar13's comments represent a typical example from that group of people who post poorly researched opinions with the intention of pumping the stock.

    EV rentals, and EV's, will not solve urban pollution. In China, only a very small amount of emissions comes from road transport compared to what is being thrown out by the country's dominant coal fired power stations-these are the power stations that supply the electricity for the EVs. The net effect will be small.

    It is a complete fantasy to suggest that future profit margins will be anywhere near current levels. The EV car in China will be a mass produced commodity product. There is already a significant amount of EV manufacturing capacity in existence or being built by China's State Owned Enterprises, as well as a number of other manufacturers. This compares to a very uncertain pick up in demand for EVs from customers- EV demand was already a flop when the last set of PRC government subsidies for EVs were in place, and sales goals missed by a huge margin in all cities where there was a pilot EV program.. Loads of production capacity but uncertain demand - do the math on the profit margin.

    It is also highly unlikely that Kandi will be able to make fat profit margins selling cheap EVs to near bankrupt government municipalities for their EV rental program. Even with that, government subsidies for EVs are still required to make it work. The idea that foreign owned EV makers such as Kandi will be allowed to consistently make big profits in the future off the back of cash strapped municipalities and government subsidies for a commodity product is pie in the sky.

    If people wish to promote this company, they will do it much better service by sticking to the truth rather than exaggerating it with ill founded expectations.

  • Report this Comment On June 19, 2013, at 5:56 AM, CSIHawaii wrote:

    As with all the Motley fool writers - its creative writing time. They grab one fact from someone else's article and fantasize the rest. They should go back to writing poetry.

  • Report this Comment On June 19, 2013, at 10:25 AM, Tgar13 wrote:

    In response to anti kool aid

    http://mobile.bloomberg.com/news/2013-06-19/capital-of-chine...

    They are restricting the number of news automobiles

    Via lottery all over China...

    While I agree with some of the risks you stated

    Re potential for bankrupt municipalities and

    The risk of the shunning of a company with

    Foreign stockholders....I think this could be a small

    Portion of a portfolio.

    Stocks go from 5 to 80 more often than people

    Care to admit....often over 5 years and often because value goes unrecognized

    The number on Stockholdr of KNDI is Mr Hu it's CEO....he owns 13 million shares. Not exactly

    A foreign owned company. Also he knows how

    To get footholds onto municipalities by

    Promising Jobs to them in regard to development

    Of EV manufacturing in the area...

    I personally don't like the volatility of late and think a

    PE of 30 based on future growth prospects is

    Fair. I predict EPS of .30 to .35 cents should support a share price of $9 to $11 by next

    Spring...not exactly pump and dump

  • Report this Comment On June 19, 2013, at 8:54 PM, SELLmtg wrote:

    Dear anti kool aid, and all the shorts,

    If you short KNDI, you should buy it back (to cover

    your short position) before you go bankrupt because

    KNDI will be above $50.Per share soon, very soon

    (just look at TSLA, the shorts are the ones that cover TSLA LATE, too late and they got burned.

    TSLA is above $100. And KNDI will be above $50. soon)

    1) Tech Analysis: KNDI is up today, its price is

    above its 50 day MA and also above its 200 day

    MD.

    Number of shares that sold short is high, very high

    (above 5ml shares sold short in June 2013 )

    2) KNDI's EPS (May 2013) is $0.07

    With the new vertical parking, new EV programs, incentives from the Chinese Gov/Cities will make KNDI's 2013 eps = $0.40 per Quarter or $1.20 per year (higher than TSLA eps)

    At $1.20 eps, KNDI= $240. per shares

    or $360. per shares (compare to TSLA)

    It's time for the shorts to cover (buy their shares back) and it's time for the long to buy, buy, buy

    EV is the new trend, KNDI is the best stock. (just look at TSLA).

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