"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:
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Company
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52-Week Low
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Recent Price
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CAPS Rating (out of 5)
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Dolby Labs (NYSE: DLB )
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$27.06
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$52.42
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*****
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Northrop Grumman (NYSE: NOC )
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$33.81
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$57.66
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***
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Belo Corp
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$0.47
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$6.38
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**
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Tyson Foods (NYSE: TSN )
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$7.51
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$14.65
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**
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Lexmark International (NYSE: LXK )
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$14.23
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$32.26
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*
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Companies are selected from the "New Highs & Lows" lists published on WSJ.com on Thursday and Friday last week. 52-week low and recent price provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.
"Everybody loves a winner"
After the tumble markets endured over the last few weeks, you might be surprised to discover that any stocks are still doing well. But yes, a few of them are. Lexmark, Tyson, and Belo are all trading at their highest levels in a year.
Judging from the ratings they're handing out, though, Fools don't think any of these three will hold onto its gains. Northrop Grumman, in contrast, appears fairly priced, while some of the best investors on CAPS insist Dolby's downright cheap (relative to its potential.) What makes Dolby the winner in this race? That's what we aim to find out, and we dive right into …
The bull case for Dolby Labs
CAPS All-Star FAOFool calls Dolby "well-managed with little debt" and "well-positioned in an industry that will thrive into the future." And pharmdoc13 agrees, observing that: "Home theater and neat live sound quality never go out of style."
Within this industry, All-Star investor wuff3t argues that: "no-one looks like unseating them. As long as they can take advantage of changing technologies by persuading others to use Dolby products (which shouldn't be too difficult for them given their unparalleled reputation for excellence) they can continue to reap profits for years to come."
I sure hope wuff3t is right about that, though. Because from where I sit, investors in Dolby today are going to need every one of those years of profitability if they're to have any hope of earning a profit on this stock.
Why so glum, chum?
Not because I hate the company, certainly. To the contrary, I've admired Dolby as a business ever since Fool co-founder Tom Gardner introduced the stock to us at Motley Fool Stock Advisor more than three years, and three separate recommendations, ago.
The company has done a great job of monetizing its products, forging alliances with the likes of Motorola (NYSE: MOT ) and Disney (NYSE: DIS ) , licensing its technology to LG and Microsoft (Nasdaq: MSFT ) . It's a consistent grower, a strong producer of free cash flow, and nearly debt-free with a large pile of cash. In many respects, Dolby is actually one of my favorite companies.
No, my objection to Dolby hinges on one thing and one thing only: The stock price. Selling for nearly 25 times earnings, and 23 times free cash flow, Dolby's valuation already captures every possible thing that can go right for this company for years to come -- and then some.
Foolish takeaway
To my Foolish eye, Dolby would need to nearly double the 13.6% annual growth rate that Wall Street projects for it over the next half decade in order to have any chance of rewarding investors at today's price. While I'm not saying that's impossible … it does seem unlikely.
And as soon as investors realize this -- that, Fools, is when Dolby's stock will fall.
Disagree? Feel free. If you believe Dolby can beat the odds, don't be shy -- tell me why!
Motley Fool CAPS: It's fun, it's free, and it just might make you famous.
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