"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. Every day, investors read the list and tremble -- some with greed, others with terror. Within our Motley Fool CAPS investing community, these top stocks generally enjoy favorable ratings, since everyone loves a winner ... but not always:
|
Company
|
52-Week Low
|
Recent Price
|
CAPS Rating
(out of 5)
|
|
McDonald's (NYSE: MCD )
|
$50.44
|
$63.39
|
****
|
|
Fifth Third Bancorp (Nasdaq: FITB )
|
$1.01
|
$12.71
|
**
|
|
Rambus (Nasdaq: RMBS )
|
$5.99
|
$24.74
|
**
|
|
Delta Air Lines (NYSE: DAL )
|
$3.51
|
$13.29
|
*
|
|
GenVec (Nasdaq: GNVC )
|
$0.33
|
$3.29
|
*
|
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.
Beggars can't be choosers (but maybe we should be)
After a week like the one we just endured, you're probably thinking there's no way any stock could still be doing well -- but in fact, several are. The five companies named above, for example, all sit at their highest levels in a year.
Unfortunately, if you ask most CAPS members, they'll admit to serious doubt that many of these stocks can hold onto their highs -- with one exception ...
McDonald's
What will keep McDonald's rising? CAPS All-Star thievaryx has a few ideas. For example: "some new store brands [could] push growth. In the meantime, McD's is turning into a cash cow, returning that monster cash flow to investors."
No surprise there. As dbarta99 points out, McDonald's is an "American staple. Will never go out of business, it is recession proof, and the dividends are nice!"
alfred13, too, finds: "Both the valuation and the dividend move forward in a very comforting way," and avers: "This stock will help me toward balancing my portfolio with a company with an international presence."
American staple, international grower
It's interesting that alfred13 should mention McDonald's international business, because as fellow Fool Alyce Lomax pointed out just last week, foreign sales are "where it's at" for McDonald's these days.
While U.S. growth stagnated last quarter, comparable sales around the globe increased by 2.3%. Quirks of currency exchange explained 5% of the 7% in revenue gains McDonald's boasted of last quarter. Even better, thanks to a still-weak greenback, a lot of those foreign sales turned out to be worth extra profit -- once translated into U.S. dollars here at home. Net profit at Mickey D's consequently rose 23%.
Now as Alyce points out, this still leaves McDonald's shares trading for the princely sum of 15.5 times earnings. Relative to rivals like Panera Bread (Nasdaq: PNRA ) or Starbucks (Nasdaq: SBUX ) , which sell for P/Es of 27 and 44, respectively, a 15.5 P/E may look like a bargain. On the other hand ... both of those companies are growing quite a bit faster than McDonald's, whereas most analysts fear McDonald's will struggle to exceed even 9% annualized five-year growth going forward. And the situation may be even worse than that.
While McDonald's has not yet filed its 10-Q, or revealed the status of its cash flows for the fiscal fourth quarter, we do know that over the four quarters preceding the most recent, free cash flow at the restaurant chain lagged reported net income significantly. Free cash flow for the most recent 12 reported months amounted to $3.8 billion, versus $4.3 billion in "net income." Add in a hefty slug of net debt ($8.9 billion at last report), and McDonald's enterprise value weighs in at a whopping 20.3 times its annual free cash flow.
Foolish takeaway
Judging from its four-star rating on CAPS, a lot of Fools believe that McDonald's is worth the price -- and there's merit to that argument. In addition to the value proposition on the shares themselves, for instance, McDonald's pays out a hefty 3.5% dividend to its shareholders.
The way I look at it, though, the certainty of a safe dividend rarely outweighs the risk of buying overvalued shares. I wonder how willing investors will be to pay a premium for the Golden Arches if and when the dollar begins regaining value -- and McDonald's exchange rate tailwind fades? Or if investors simply take a second look at the numbers, and begin to question whether 9% long-term growth justifies a 20 times multiple to free cash flow?
Time to chime in
You've heard the pros. You've read the cons. Now it's time for you to tell us whether these arches are as good as gold.
At Motley Fool CAPS, you make the call.
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