3 Stocks Near 52-Week Highs Worth Selling

Even though cost-cutting has been the primary reason for most EPS beats early on this earnings season, the broad-market S&P 500 continues to take out new all-time closing highs on a nearly everyday basis. 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. Take Texas Instruments, for example, which reported better-than-expected second-quarter results earlier this week as it's beginning to reap the benefits of moving away from semiconductors used in wireless devices and instead focusing on those used for power management and in automobiles. With far less competition in these areas, Texas Instruments is expected to generate more robust margins.

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

Lights out, China
China may have its fair share of struggles -- which has caused its strong economy to back off its 30-year average growth rate of 10% -- but when push comes to shove, plenty of investors are still paying close attention to multinational companies making investments in China. However, if there were one sector with a gigantic "beware" stamp attached to it, it would be Chinese solar panel producers like Hanwha SolarOne (NASDAQ: HSOL  ) .

Hanwha and much of the Chinese solar sector have seen enormous rallies in recent weeks on the heels of news from China that it plans to add 35 GW of solar energy by 2015. Even with prices nowhere near optimal, this move is seen as a way for the Chinese government to support a very debt-riddled sector. But two key factors are working against Hanwha.

To begin with, Europe is set to enforce a whopping 67% tariff on Chinese solar panels beginning early in August. This movie will wipe out almost any pricing advantage Chinese companies had in Europe. The other factor here is the health and pricing power that U.S. solar producers like First Solar (NASDAQ: FSLR  ) suddenly have. Comparatively speaking, First Solar has strong free cash generation and $439 million in net cash. Hanwha has had a free cash outflow in all but one year since inception and boasts $622 million in net debt with a shrinking cash pile. With First Solar's higher-efficiency panels and lessening costs, it can give any Chinese manufacturer a run for its money in the States and even overseas.

With the prospect of profitability a long way off, I'd say even something as simple as survivability could be in question with Hanwha, and, as such, would recommend hitting the exits here.

Don't fight history
Sometimes we just have to remember as investors that there isn't room enough for every company to succeed. Thus enters dELiA*s (NASDAQ: DLIA  ) , an online and mail catalog retailer that markets apparel to teenage girls and young women.

Some common thoughts might enter your mind here, such as, "That sounds like a core niche where it should be able to expand its market share," or, "Focusing on Web sales, it should have no trouble reaching young consumers." What I need you to do now is take those thoughts and completely throw them out the window, because that isn't the case with dELiA*s at all. In fact, in dELiA*s most recent quarter, it delivered a depressing 14.6% decrease in cumulative revenue and a same-store sales decline for its prominent retail segment of 7.1%. Furthermore, gross margins declined by 740 basis points in its retail segment as it turned to steep markdowns to help move excess inventory. 

This might sound like a problem that could have a fix, but if you look at dELiA*s historically, it's had plenty of time to right the ship and has failed. It's only turned an annual profit in two of the past 10 years, and has been free cash flow positive only once since 2004 -- and that was a year in which it struggled to deliver $0.01 per share in free cash flow! To add even more complexity to its apparent issues, it recently hired a new CEO, Tracy Gardner, who was herself just hired in April as the company's chief creative officer.

This has all the makings of a sinking ship without any identifiable catalyst or differentiating factor from its peers. If you ask me, I'd say, avoid, avoid, avoid!

Paper profits and real-world disappointments
We really can't deny the fact anymore that cybersecurity has become a practical necessity for today's businesses and governments. Hackers are becoming more sophisticated, but so are software developers, who are coming up with countless new ways to stay ahead of would-be hackers. While the entire sector is likely to see an influx of business, not every company makes sense as a smart investment.

One company in particular I'd suggest putting back on the sales rack is Proofpoint (NASDAQ: PFPT  ) , a threat and regulatory security-as-a-service provider. The profit potential is certainly there. Proofpoint's SaaS model is built around getting the client hooked on its products and making it inconvenient and cost-inefficient for them to switch to a competitor. In other words, it's setting up its own razor-and-blades model that should fuel recurring revenue for years to come.

Unfortunately, investors seem to think we're already in the year 2016 or beyond, because they're pricing Proofpoint up in nosebleed status despite the fact that it's unlikely to be profitable on an annual basis until fiscal 2015. In its most recent quarter it saw sales rise by 25% (that aforementioned but expected robust sales growth), but delivered net operating cash flow of just $1.2 million. Extrapolated, that's a market value to free cash flow value of around 170! I don't know about you, but this sounds like the epitome of trying to squeeze blood out of a turnip. My suggestion would be to wait for a significant pullback or allow Proofpoint's cash flow to catch up with its valuation over the next year or two.

Foolish roundup
This week's theme is all about "what you've done for me lately." In each case, all three companies present compelling reasons for a rebound on paper, but none of the three has delivered a profitable year anytime recently (or ever, in some cases!). Until we see decisive steps in the right direction, I'd suggest keeping your distance.

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?

As dELiA*s failures have shown, the retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.


Read/Post Comments (6) | Recommend This Article (0)

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 July 25, 2013, at 11:45 AM, tblakeslee wrote:

    You had better do a bit more research on HSOL. It is a Korean company with factories in Germany, Malasia and China so it will have no tariff problems and it will benefit from China's spending. Though it has recently doubled in price, it is still dirt cheap with a price/book ratio of only .82 and cash reserves of $1.90/share. They the only solar company that increased R&D spending in 2012 so they have some amazing epi-thin technology which will cut their manufacturing costs by 50%.

  • Report this Comment On July 25, 2013, at 2:18 PM, dsong wrote:

    I agree with the comments. Why the author picks the hsol as hit target?

    Please remember the Korea bought the solf (hsol)

    49% shares at the price 10.89/share. Its fair price is still well below the value.

    HSOL has big room to up at least to 10+ then consider to sell.

  • Report this Comment On July 25, 2013, at 2:19 PM, king4life wrote:

    Hanwha bought Germany's QCells and Hanwha SolarOne is on record in solarpvinvestor magazine July 8th as saying "SolarOne will toll over 400 MW of modules for Q CELLS in 2013."

    In Q1 Solarone was running at max capacity which provides efficiency. SolarOne also gets to use and technology QCells has developed.

  • Report this Comment On July 25, 2013, at 9:08 PM, NavinRJohnson75 wrote:

    You failed to mention in the article that the poly plant in Malaysia comes on full boar in January further reducing costs for HSOL. You and Hoium have been bashing Chinese solar, and it seems you have missed out on some nice gains. It is a nice trick to pick up some cheap shares for your cronies, however.

  • Report this Comment On July 26, 2013, at 6:39 PM, Foolproof60 wrote:

    HSOL also has plenty of unused credit line for expansion, like $350 million with the bank of China, $450 million guaranteed by their 50% owner Hanwha Mining and just got an additional $100 million by one of their subsidiaries. I would think they have lots of growth and profits coming in the near future!

  • Report this Comment On July 28, 2013, at 7:49 AM, Foolproof60 wrote:

    Also, a Europe tariff is no reason to sell HSOL, since Europe only represents 5% of HSOL business, but I can understand how some profit taking is now going on.

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