Get Ready for the Fall?

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"The bigger they are, the harder they fall." It's the worst nightmare of every investor in today's market -- buying a rocket stock just before it takes a nosedive.

Every day, WSJ.com publishes a list of stocks whose shares have just hit new 52-week highs. And every day, investors read the list and tremble -- some with greed, others with terror. In our Motley Fool CAPS investing community, these top stocks usually enjoy favorable ratings, because everyone loves a winner.

But not always ...

	52-Week Low	Recent Price	CAPS Rating (Out of 5)
Coca-Cola (NYSE: KO)	$37.44	$57.48	*****
General Mills  (NYSE: GIS)	$46.37	$67.94	****
Cardinal Health  (NYSE: CAH)	$24.87	$31.77	****
Merck  (NYSE: MRK)	$31.25	$36.46	****
Best Buy  (NYSE: BBY)	$16.42	$43.30	***

Companies are selected from the "New Highs & Lows" lists published on WSJ.com on Friday last week. 52-week low and recent price provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

Everybody loves a winner
And really, how can you not love these companies? Even when the rest of the market hit a speed bump last week, these unstoppable stocks just powered higher.

Best Buy, Merck, General Mills ... everyone knows these names, but one of them may be more familiar than most today. Just last week, Coca-Cola appeared on this very same list as a four-star stock -- but lost pride of place at the top of the list to a lesser-known, but better-rated, industrial play. This week, Coke has reclaimed both top honors, and on Friday it regained its lost fifth star. Let's find out why.

The bull case for Coca-Cola

• Jtweez19 lays out the bull case for us in nice, straight lines: "Most recognizable brand in the world?.. Check ... Global expansion?.. Check ... People are going to [continue] to drink Coke products for a very long time. This is a, 'Build your portfolio foundation' play."
• And jonnygarbe makes it even plainer: "Massive brand, nothing will stop people drinking coke. Its simple!"
• And alabeaty argues that "[s]teady dividends in a recession means stable company, good management."

So growth, brand recognition, and a "steady" dividend of 2.9%. That's a good start, but what about the valuation? On the surface, at least, Coke looks like anything but a bargain:

• For one thing, it's selling for 21.3 times trailing earnings. Consensus growth estimates of 6.5% suggest that at this price, the stock is pretty seriously overpriced. (And if you haven't noticed, PepsiCo is (NYSE: PEP) priced lower, and projected to grow faster.)
• Add in the fact that Coke generates free cash flow somewhat less than its reported earnings, and chances for outperformance look bleak.

That said, an armor-plated brand like Coca-Cola may not perform as traditional PEG analysis would suggest. Historically, this company has managed to maintain an average P/E ratio just shy of 30.5 for the last decade, in good times and bad. Right now, the stock's trading far below that level. (In fact, the discount to historical P/E here is even bigger than the one we found at ExxonMobil (NYSE: XOM) last week.)

And while I'm not convinced that Coke deserves the high P/E ratios investors have always paid for it in the past, the fact remains: They have always paid for it in the past -- and old habits die hard. When all's said and done:

• the huge magnitude of the discount to Coke's traditional valuation
• the huge-verging-on-unswimmable size of the moat surrounding this business
• and Coke's ability to generate positive free cash flow in even the worst of markets ...

... all lead me to believe that Coke at today's price represents a "safe harbor" stock. In a world where some very iffy companies have run up to very high prices, Coke at least lets you rest easy, secure in the knowledge that you own a solid business.

If you believe, as I do, that the market's "overbought" and primed to sell off, you could do worse than by having a Coke and a smile.

Time to chime in
But that's just my opinion. What we'd really like to know now is what you think about Coca-Cola? Is this stock as secure as I think it is? Or will investors come to the realization that even Coke isn't worth a 3.3 times PEG ratio? If you've got an opinion, we've got a place to share it.

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