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


DD Chart

Background: E.I. DuPont de Nemours is involved in science and technology in a range of disciplines including high-performance materials, specialty chemicals, pharmaceuticals and biotechnology. The company trades an average of 3 million shares per day and has a market cap of $63 billion.

52-Week Range: $52.02 to $69.64

Dupont's competitors include BASF SE (BASFY) and Dow Chemical (DOW).

Dupont faces a billion dollar lawsuit from an ironworker's union pension fund. The market quickly brushed it aside, and the stock is near multi-year highs. In other words, lawyers may make some money but don't expect a court order forcing Dupont to cut a check anytime soon.

According to Dupont's CEO Ellen Kullan in the last earnings call, a $100 investment from the end of 2008 to the end of 2014 would have been worth $314 versus $228 for the S&P 500.

Dupont's $1.80 annual dividend makes it easier to pull the trigger. That works out to a yield near 2.6% and you may want to leave it in your portfolio regardless of the share price.

Company share buybacks have resulted in a relatively stable float. The target amount of buybacks appears to exceed employee option grants. The company announced it would continue with another billion in buybacks this year. One point to note with insider transactions, they're not buying shares. With the stock near $70, it's a good example how insiders often make poor market timers.

The last reported short interest is paltry and without reason to consider it a meaningful influence at only 2% of the average trading floats.

As previously stated, rising revenue and income per share drives a stock to new levels. Dupont encapsulates both and I believe the shares will continue appreciating.

WAG Chart

Background: Walgreen Co., together with its subsidiaries, operates a network of drugstores in the United States. It provides consumer goods and services, pharmacy, and health and wellness services through drugstores, as well as through mail, and by telephone and online. The company trades an average of 5.1 million shares per day and has a market cap of $72 billion.

52-Week Range: $43.31 to $75.16

Competitors include Rite Aid (RAD), CVS Caremark (CVS), Walmart (WMT), and Target (TGT). Rite Aid is in recovery mode and is enjoying a spectacular run this year. On Thursday, Rite Aid announced preliminary first quarter financial results. The news sent shares sharply lower, albeit buyers stepped forward, and the stock was able to close near the high of the day. Shares of Rite Aid are up over 190% in the last year.

Walgreen pays $1.26 annually in dividend payments for a yield of 1.8%. As a pure dividend yield play, I would wait for a pullback to about $71-$72 a share. If the overall market continues to only move higher, Walgreen may not see $70 again, but it's dangerous to think the market is limited to upward motion.

As of the last earnings report, same-store sales were up 4.3% and overall sales climbed 5.1%. Diluted earnings were down slightly. Diluted accounts for an expected increase in the shares outstanding. Using diluted per share numbers is the best indication of what an investor can expect.

The overall market historically fools most of the people most of the time. As soon as the last of the bears throw in the towel the market will drop and you will have a buying dip to enter.

WAG Gross Profit (Quarterly) Chart


BRCM Chart

Background: Broadcom Corporation designs and develops semiconductor solutions for wired and wireless communications.

52-Week Range: $23.25 to $37.96

Broadcom shares have been on a tear since the start of June. The company announced it's seeking a buyer to unload its cellular-baseband business to. Removing that Albatross from the balance sheet means a renewed focus on its core competencies and reason why shareholders can expect further appreciation.

I think Broadcom continues higher, but here's the thing. You probably should wait and buy on a dip. At $38, it feels a lot like chasing, and that usually doesn't end well.

Based on option premium, the market is pricing in an 11%, or about $4.06 move in the next two months. That means, as a shareholder or potential investor, you should anticipate the stock to trade as low as $33.01, and/or jump higher to $41.13 according to call and put buyers.

While option traders are pricing $33 as the lower end of the expected short-term trading range, $33.50 is a sweet-spot entry level. The forward price-to-earnings ratio is only 13 and not pricing in much for growth. At $33.50, the P/E ratio drops to a level that enables exposure without worrying about lack of growth.

If Broadcom can accelerate revenue and earnings, you win. If not, and things remain stagnant longer than expected, the dividend payments will help keep you in a position while waiting it out.

At the time of publication, the author had no position in stocks mentioned.

Follow @RobertWeinstein

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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