3 Stocks Near 52-Week Highs Worth Selling
May 31st 2012 10:54AM
Updated May 31st 2012 10:58AM
The rain in Spain apparently lies mainly in Europe, because weakening U.S. indexes haven't had a great impact on the huge number of stocks still near a 52-week high. For optimists, these rallies may seem like a dream come true. For skeptics like me, they're opportunities to see whether companies have earned their current valuations.
Keep in mind that some companies deserve their current valuations. American Capital Agency (NAS: AGNC) , a mortgage real-estate investment trust, is hitting new highs as the company benefits from record-low interest rates and investors' fear of market volatility.
Still, other companies might deserve a kick in the pants. Here's a look at three companies that could be worth selling.
If you build it, they will run
My Foolish colleague is right: The housing sector will rebound. But if I'm right, that's still a good five to 10 years away, which makes the recent run in Lennar (NYS: LEN) seem a bit unfounded.
I will, however, give credit where credit is due and point out that Lennar has the highest homebuilding margin in the sector and did report an impressive 33% increase in new home-sale orders in its latest quarter. What doesn't make sense to me, though, is how homebuilders can keep pumping out new homes and attempting to raise their prices when the Case-Shiller Index, a key measure of home prices in 20 of the largest U.S. cities, keeps falling, while millions of foreclosures are just waiting to be dumped onto the market.
It's my contention that there is more disposable income for people to spend, but homeowners are increasingly choosing to remodel their existing homes, rather than purchase new ones, because of unstable housing prices and banks' unwillingness to lend. We're seeing strength in home remodeling demonstrated every quarter by Home Depot (NYS: HD) , which has been taking market share from its rival Lowe's and is set to capitalize on both the consumer and commercial sides of the housing market. Like NVR, Lennar may be one of the best homebuilders -- yet there are still few reasons to own the best stock in the worst sector.
Turning a blind eye
We often see biotechnology stocks whose valuations depend primarily on one key drug. A success could mean an instant double or more, while failure practically wipes out all shareholder value. Now, did you know you can also witness this in the technology space?
ParkerVision (NAS: PRKR) -- a micro-cap with an intellectual-property portfolio catered to radio-frequency technology solutions for next-generation mobile devices -- is betting the boat on its IP portfolio and its current patent infringement lawsuit against Qualcomm. If successful, ParkerVision's stock could run significantly higher than its current levels. However, from a fundamental perspective, the company is a vacuum of shareholder equity.
Being wholly reliant on its IP, ParkerVision has no revenue. With no available cash generation, the company turns to issuing shares to fund its operations and pay its legal bills. In its recently released first-quarter results, it noted that outstanding shares now stand at 67.6 million -- that's up substantially from the 52.9 million reported one year ago. In fact, this figure has doubled since the end of its fiscal 2009 results. With no products, a continuous cash outflow, and no end to the dilution, I'd consider selling into this recent strength.
Trimming the fat
Sometimes you have to trim the fat from your portfolio -- in a literal sense.
EnteroMedics (NAS: ETRM) , a clinical-stage biotechnology company focused on creating devices that use neuroblocking to treat obesity and gastrointestinal disorders, should be put on a restrictive diet after the recent run-up in its stock price.
The company's primary device, the Maestro Rechargeable System, was sold internationally for the first time in the first quarter, and the company notched $123,000 in revenue from the device. That's not exactly a barnburner of a start, if you ask me. For the quarter, EnteroMedics still lost $2.7 million despite the revenue it brought in. The company also recently announced a $20 million revolving-credit facility and the issuance of $5 million worth of shares in order to raise its cash balance. That's biotech talk for "We're burning through our cash."
The irony is that until EnteroMedics gets a lot closer to profitability, it seems to be carrying around far too much weight.
This week is all about companies betting the boat on things they can't necessarily control. Lennar has little say over what happens to housing prices, ParkerVision has nothing going for it beyond its intellectual-property portfolio, and EnteroMedics has no guarantees its devices will be used by physicians. 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?
Share your thoughts in the comments section below and consider using the following links to add these three stocks to your free and personalized watchlist so you can keep track of the latest news on each company. And to avoid investing in stocks like these, consider getting a copy of our special report, "The Motley Fool's Top Stock for 2012." In it, our chief investment officer details a play he dubbed the "Costco of Latin America." Best of all, this report is free for a limited time, so don't miss out!
At the time this article was published Fool contributor 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.Motley Fool newsletter services have recommended buying shares of Home Depot, as well as writing covered calls on Lowe's. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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 that never needs to be sold short.
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