52 Week High and Beyond?
Steve is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Perusing the NYSE 52 week highs for Friday May, 25th, I am intrigued by the variety of companies making the list. I am usually more comfortable picking through the 52 week low list for potential turnaround or value plays, but the 52 week high list presents some attractive stock ideas. Atop the list alphabetically is AOL, Inc. (NYSE: AOL), an Internet content and web services company which touched $27.94. Another stock making a 52 week high was Cooper Industries (NYSE: CBE) which is an electrical equipment maker that reached $71.68 during the week. US Airways Group (NYSE: LCC), an international airline company, fetched a 52 week high of $12.40. Also making the list were Wal-Mart Stores (NYSE: WMT), the worldwide retailer, which traded at a 52 week high of $65.50 and Hawaiian Electric Industries (NYSE: HE), the electric utility for Oahu, Hawaii, Maui, Lanai, and Molokai islands in Hawaii which saw its shares hit $27.47.
So what do these companies have in common? Other than making new highs, not much. While AOL reached a new 52 week high during the week, the significant move toward the new high actually happened on April 9 when the company announced that it was selling more than 800 patents to Microsoft for $1.1 billion. Some analysts valued the patents as low as $300 million thus the actual price was a stock mover. On April 9, AOL’s shares jumped almost $6 per share to $26.40 and have migrated higher since then. Shares of AOL have recalibrated to the patent sale price and like Cooper Industries have little upside at this point.
The rise in Cooper Industries is more clear cut. Industrial giant Eaton Corp. proposed an $11.8 billion bid for the company on May 21st. The bid sent shares of Cooper soaring over 25% during Monday's trading and is the third-largest proposed merger of 2012. Cooper Industries is essentially fully valued at the bid price of $11.8 billion so I see a poor upside/downside ratio.
U.S. Airways is riding positive fundamentals. Falling oil prices have improved profits as jet fuel is a significant variable cost for airlines and earnings estimates for U.S. Airways are rising. Although U.S. Airways has the lowest forward P/E ratio of this group at 5.2x and 4.3x for 2012 and 2013, respectively, the earnings volatility of airlines raises the risk profile way above my comfort level.
Given last month’s news about alleged bribery at its Mexican subsidiary, the rise in Wal-Mart’s shares is surprising. During the week at the Morgan Stanley retail conference, Wal-Mart’s U.S. chief indicated that the company’s Wal-Mart Express small store format is exceeding expectations and is profitable in contrast to competitor Tesco’s Fresh & Easy format which is currently unprofitable and being scaled back.
Hawaiian Electric’s share price rose during the week after two favorable announcements. First, the company announced that it will buy electricity at pricing not tied to the price of oil from a biofuel company. Secondly, the Hawaii Public Utilities Commission approved a 3.16% rate increase for one of the co.’s subsidiaries. These announcements follow the release earlier in the month of results that beat consensus estimates both in revenue and earnings.
Wal-Mart and Hawaiian Electric both carry forward price to earnings to growth (PEG) ratios of 1.4x for next year but the growth rate for Hawaiian Electric is expected to drop to 7.5% in 2013 from 11.8% in 2012 thus the 2013 PEG is 2.1x compared to 1.4x for Wal-Mart. Although the stability of earnings and dividends for utilities are attractive, it appears that Hawaiian Electric has gotten ahead of its fundamentals while Wal-Mart could see more multiple expansion before shares become too pricey.
Of these companies reaching 52 week highs, I am most intrigued by Wal-Mart for its potential share price appreciation going forward. Adding to its appeal is the 2.4% dividend yield which can augment total return for long term investors. Wal-Mart had been in a trading range of around $50 to $60 for the past three years so this breakout to $65 could be the initial move to a higher permanent level. I would be a big buyer of Wal-Mart on any significant dips that occur in a broad market decline.
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