3 Stocks You Might Want to Bet Against

Here are three stocks you might want to consider betting against. The article below discusses three stocks that are at their 52 week high, and why they might not stay there for long. It just may be time for some bearish LEAPS. Take a look and see what you think.

Despite large market moves becoming the norm, that hasn’t stopped more than 450 companies from nearing new 52-week highs. For optimists, these rallies may seem like a dream come true. For skeptics like me, they’re opportunities to see whether companies trading near 52-week highs have actually earned their current valuations.

Keep in mind that some companies do deserve their current valuations. Alaska Air (NYSE: ALK  ) , for instance, has been flying higher despite American Airlines parent AMR announcing it was filing for bankruptcy protection. As a regional airline, Alaska has been able to control its costs better, which has allowed it to undercut the prices charged by national carriers.

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

This stock’s all fluff
What makes for a good long-term investment is a product with broad appeal and staying power. Somehow, I have a hard time throwing teddy bears into that category. The problem with the teddy bear is that it’s a very cyclical product and I have little clue exactly how you would define “innovation” when it comes to making bears? This helps to sum up to this weeks’ first kick to the curb: Build-A-Bear Workshop (NYSE: BBW  ) .

For a bear-making operation, Build-A-Bear is trading at a hefty premium. The company, which has reported significantly wider-than-expected losses in two of its past three quarters, is likely to report flat revenue growth in 2011 and just 4% growth in 2012, according to analyst estimates. Yet Build-A-Bear is valued at 25 times forward earnings and more than 360 times trailing-12-month figures. As I see it, this stock is all fluff and simply doesn’t deserve your hard-earned money.

Clinical trial blinders
I’ll be the first to admit that valuing a drug which hasn’t even hit the market yet is a crapshoot at best. Sometimes I look like a genius, and other times, as Pharmasset (Nasdaq: VRUS  ) and its $11 billion buyout proved, I look like a dolt. And still I press on! Today, I’m taking on Halozyme Therapeutics (Nasdaq: HALO  ) , which has had a series of good news lately. Insiders are snapping up shares and the company reported positive phase 3 results for Herceptin with partner Roche and positive phase 2 trial results for Cinryze with partner ViroPharma (Nasdaq: VPHM  ) .

So why bet against Halozyme, you might wonder? I refer to it as the Human Genome Sciences (Nasdaq: HGSI  ) rule. Human Genome had its lupus drug approved by the FDA, but investors soon realized that approval does not lead necessarily to profitability or acceptance of the drug. Even with approval of Herceptin, it’s very unlikely Halozyme will be turning a profit and it’s still a year away from any phase 3 results on its partnership with ViroPharma. At 36 times book value and a shrinking pile of cash, I’d just as soon throw Halozyme back from whence it came.

Clouded judgment
Investors have had consolidation fever in the cloud-computing sector ever since SuccessFactors agreed to be purchased, but this doesn’t exactly mean rational thoughts are prevailing. In fact, I’d call the recent trading action in small cap SPS Commerce (Nasdaq: SPSC  ) pretty much the opposite of rational.

The company, while profitable and growing healthfully in the double digits, is trading at an astronomical 368 times trailing-12-month earnings and 58 times next year’s estimates. Don’t get me wrong, SPS is moving revenue and profits in the correct direction, but it’s at nowhere near the pace it should be for the valuation bestowed upon it currently. Even more troublesome, insiders have sold more than 2.5 million shares within the past seven months, many of which represented shares that came from options grants. The company’s valuation and lack of insider buying isn’t inspiring any confidence in me and I’d advise leaving SPS be until its valuation comes down out of the clouds.

Foolish roundup
Whether it’s a lack of innovation or a valuation bordering on insanity, you can always count on your Motley Fool perma-skeptic (i.e. me) to point them out. I’m so confident these three stocks are headed lower I’m going to start them with an underperform rating on CAPS. The question now is, would you do the same?

See the Motley Fool for the rest of the story

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