3 Stocks Near 52-Week Highs Worth Selling

Are these three stocks sells or belles? You be the judge!

Jul 17, 2014 at 1:45PM

The broad-based S&P 500 may have suffered its first down week in quite some time, but that hasn't stopped more than 2,100 stocks in The Motley Fool CAPS database from creeping within 10% of a fresh 52-week high. For skeptics like me, that's an opportunity to see whether companies have earned their current valuations.

Images

Source: Damon Sacks, Flickr.

Keep in mind that some companies deserve their valuations. Take national insurer WellPoint (NYSE:ANTM) as a perfect example. WellPoint's shares have surged roughly 40% from their 52-week low as the company has capitalized on the implementation of the Affordable Care Act, better known as Obamacare. With its purchase of Amerigroup, WellPoint was able to greatly expand the number of government-sponsored members it covers and has been able to attract hundreds of thousands of members in key markets, such as California. WellPoint is among the rare group of insurers that's already seeing profits from its Obamacare enrollment segment. With the stock valued at just 12 times forward earnings even after its recent run-up, and millions of Americans still left to be insured, WellPoint's run may not be anywhere near done.

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

Going soft
For the first stock near a 52-week high worth selling, I'm calling out a well-known tech giant and suggesting it could be time to lock in those gains and wait for a substantial pullback. Come on down, Microsoft (NASDAQ:MSFT)!

The perennial tech giant has plenty of positives to offer shareholders, and I believe its recent rally is partly deserved. Microsoft's Windows OS remains the dominant force among operating systems worldwide, with OEM revenue growth of 4% in its latest quarterly results released in April. Also, the addition of 1 million new Office 365 Home members, as well as substantial growth in its cloud segments, is cause for applause. In addition, Microsoft was able to snag market share for its search engine Bing: Advertising revenue grew 38%.

Microsoft Bing
Source: Microsoft.

Like I said, this is Microsoft we're talking about, and it's a perennial beast. But that doesn't mean its current valuation of $350 billion accurately reflects its growth opportunity over the next couple of years.

For example, many of the factors that have boosted Microsoft's top- and bottom-line results recently are highly cyclical. The release of the Xbox One gaming console after eight years of development certainly brought Microsoft plenty of attention, but the console is unlikely to see this much interest beyond the next quarter or two. Similarly, even with Bing's improved market share, the online advertising sector is highly tied to the health of the economy. With Google still well into control of search market share and U.S. economic growth looking challenged with the removal of QE3, I'd opine that spending on advertising may be shakier than most businesses are forecasting for 2015.

Also consider Microsoft's valuation. Under normal circumstances a double-digit revenue growth coupled with a forward P/E of 15 would be welcome news for investors. Yet, if you dig deeper you'll see that Microsoft's EPS growth is considerably slower, in the mid-single-digit range. The reason is that Microsoft is spending heavily on cloud research and development. My big concern is that beyond Windows and Bing, Microsoft has a very mediocre history of product development and acquisitions, so I'm not sold on Wall Street's growth projections.

If we're looking at pure organic growth coupled with Microsoft's current level R&D spending, shares are about 20%-25% higher than I'd like to see them. This doesn't make Microsoft a bad company in any way, but it could offer an opportunity to lock in some gains and grab shares a few months or years down the road at a much cheaper valuation.

Lights out on this stock
Speaking of a company whose future looks bright on paper but whose valuation is a few years ahead of its time, the next company up on this week's possible "sell" list is SunEdison (NYSE:SUNE).

SunEdison is a provider of solar energy services and solar modules that's expected to benefit within the U.S. and in emerging-market economies like China as the need for solar energy grows. Solar energy costs have come down considerably since the recession which is making it much easier for solar companies to turn a profit. Furthermore, governments around the world have been more than willing to implement solar projects that have boosted solar backlogs across the sector.

Www
Source: Andreas Demmelbauer, Flickr.

In SunEdison's first quarter the company noted that its solar project pipeline had grown to 3.6 GW with a backlog of 1 GW at the end of the quarter. Net sales also grew 23% year over year to $546.5 million, signaling that demand for solar around the globe remains strong.

However, while investors have once again fallen in love with solar companies, I'll play the party pooper here. SunEdison's same quarterly report also pointed to a 260 basis-point decline in gross margins, a $0.2 million drop in free cash flow, and a $0.09 wider adjusted EPS loss than the prior-year period -- all while capital expenditures dipped $10.7 million from the previous year! These are certainly not figures that support a valuation in excess of $6 billion. 

Looking ahead, SunEdison isn't expected to turn the corner to profitability until 2015 -- and even then it's only expected to be marginally profitable. Based on Wall Street's 2016 projections, SunEdison is valued at close to 40 times forward earnings despite revenue growth that may slow to just 10%-13% by 2016. There's a lot of built in risk here with regard to the potential for global economic weakness or increased supply from China which could easily wreak havoc on solar pricing and demand. Regardless of how well-diversified SunEdison is globally, it'll be no match for a supply flood from China, were one to occur.

Until SunEdison is able to deliver steady profits, this is a company I'd suggest you keep your distance from.

Trade this Escalade in
Relax Cadillac Escalade drivers, I have no intention of picking on your vehicle. Instead, I'm suggesting that investors in sporting goods and information security company Escalade (NASDAQ:ESCA) consider parting with their shares after a near tripling over the trailing 12-month period.

Images

Source: Jason Powers, Flickr.

A number of factors have helped push Escalade share higher. First, the company sold its print finishing operations which could help eliminate some or all of its $20 million in debt and clear the way for Escalade to focus on expanding its business. In addition, Escalade's quarterly EPS growth of late has been impressive. In the first quarter Escalade delivered 33% EPS growth to $0.16 per share as sporting goods revenue improved 10% from the year-ago period.

But just as there have been reasons to buy into Escalade's ongoing turnaround since the recession, there are also reasons why it could be time to hang up your cleats and ring the register. Specifically, Escalade has been using cost-cutting measures to boost its EPS in recent quarters. While that has the effect of boosting margins and EPS temporarily, it's not a long-term solution to genuine organic growth. If you look at Escalade from a historic perspective, it's had a really difficult time keeping its operating margins in the upper single-digit range, which is where they're at now.

To add, although the company sold its print finishing business, it did report a 3% decline in combined information security and print finishing in Q1 from the year-ago period. With my expectation that sales and margin growth will slow, the company's trailing P/E north of 20 just doesn't make much sense.

Forget Microsoft and check out this latest development coming down Apple's pipeline which could be a game-changer! 
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of, and recommends Google (A shares), Google (C shares), Apple, and WellPoint. It also owns shares of Microsoft. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers