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TheStreet Open House

Broadcom, Walgreen and DuPont Are Three Buys Near 52-Week Highs

NEW YORK (TheStreet) -- If you're searching for value stocks making new 52-week lows, you're making a grave and common investor mistake. Most stocks that close at new 52-week lows continue to lose value. There's a reason the term "catching a falling knife" was coined, and some traders actively seek and short stocks making new lows.

A better way to find value is looking at the 52-week high list. Strong stocks become that way because they're undervalued relative to future expectations. It may feel counterintuitive to buy a stock near its yearly highs or even all-time high, but if you start a watch list of companies making new highs you'll quickly find that they tend to continue.

There are two types of new highs. Stocks that are making a blow-off top and undervalued companies that the market is playing catch up with. Blow-off tops are emotionally charged and incredibly volatile near the summit. Companies you want to buy are making new highs almost in stealth mode.

Wave Systems (WAVX), DuPont (DD), Walgreen (WAG), and Broadcom (BRCM) are four companies on my watch list right now. Three have momentum and the ability to continue growing. Each is unique in risk and potential.

WAVX Chart

Background: Wave Systems is a leading provider of trusted computing solutions. The company's shares are liquid and trade an average of 1.4 million shares per day and have a market cap of $89 million.

52-Week Range: $0.69 to $2.28

Wave Systems is my wild card of the group. The shares are cheap and for a solid reason. Simply put, the company doesn't make money. This is an example of one to keep your emotions in check with.

The company occupies the same security space as Symantec Corporation (SYMC) and VeriSign (VRSN). Symantec and VeriSign are billion-dollar companies and both are profitable while Wave Systems struggles.

It's easy to imagine Wave Systems doubling or more, and the shares might. But at the current pace you're more likely to get diluted further than make a profit. Wave Systems has about 40 million shares outstanding and it seems marketing shares in the company is the most profitable item the company sells.

In December 2013, the company sold 1.25 million shares for 97.25 cents per share. Buyers of the offering also get five-year warrants totaling another 626,674 shares at a strike price of 91 cents.

Wave Systems trades at a 1.68 Beta. That means for any given overall market move, expect shares in the company to move 1.68 times as much. You can buy it as a purely speculative play and think of the stock as options that don't expire, but you will soon find out why I think there are more favorable investments available.

WAVX Revenue Per Share (TTM) Chart


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