5 Stocks That Just Won't Quit

In my weekly Fool column "Get Ready for the Fall," I run Nasdaq.com's 52-week highs list through the "wisdom of crowds" meter we call Motley Fool CAPS. The result: a list of stocks that have flown so high, investors are starting to get nervous about that whole "gravity" thing. But while many stocks will indeed plunge back to Earth, some seem immune to gravity, steadily riding a rising megatrend to ever-greater heights.

Today, we'll move beyond stocks that have hit 52-week highs, and identify companies now surpassing five solid years of outperformance. Which of these will thrash the market averages for another half-decade? Here are this week's leading contenders:

Companies

Recent Price

CAPS Rating (out of 5)

Bull Factor

DreamWorks Animation SKG (Nasdaq: DWA  )

$43.46

****

93%

Dr Pepper Snapple

$31.75

***

93%

TJX Companies (NYSE: TJX  )

$41.63

**

83%

Estee Lauder

$60.13

*

74%

CIT Group (NYSE: CIT  )

$36.43

*

43%

Companies are selected from the "New 5-Year Highs" list published on MSN Money on Friday. CAPS ratings from Motley Fool CAPS.

Hot stocks leave investors cold
Is the recession over? Warren Buffett says it is, and with the Dow still sitting comfortably above the 10,000 mark, you'd think investors would agree. Judging from the miserly star ratings being handed out in the table up above, however, it appears many investors doubt whether Estee Lauder, CIT, and TJX Companies are worth quite as much as their stock prices suggest.

But not all Fools are doubtful. For example, despite a weak-revenue quarter, investors are bellying up to the bar for Snapple (inspired by the news that's bubbling up at Coca-Cola (NYSE: KO  ) last week, after it decided to copy PepsiCo (NYSE: PEP  ) and repurchase some bottler operations). And they're feeling positively, er, positive about DreamWorks Animation. Want to find out why?

So do I. So let's begin.

The bull case for DreamWorks Animation SKG
In evaluating this filmmaker, cadunce focuses on the basics: "All you have to do is look at their slate of films coming out this year, to see this is going to be an excellent year for 'Big D.' " (The 2010 schedule includes three new films, including the latest installment in the ever-popular Shrek series.)

Papa26 agrees with cadunce, arguing that DreamWork's films this year will: "be hot and the income from the toys and such will be substantial."

Plus, as FinerPoints, er, points out, DreamWorks is currently the: "Last man standing. (so to speak) Last Intellectual property company...Disney (NYSE: DIS  ) just bought Marvel. Warner Bros, I think [Dreamworks] is calling your name...don't let someone else acquire DWA before you do... [Dreamworks] in the meantime is successful and solid so even if no one comes to the consummation table, the company will continue to grow and compete well."

Dream or nightmare?
So heads, DreamWorks gets acquired at a premium, and tails, no one buys it, DreamWorks just keeps on churning out hits, and we profit anyway. Is this analysis too good to be true?

I realize I'm tempting fate (and DreamWorks shareholders) (and movie critics) when I say this -- but yes, this rosy scenario is too good to be true. Fact is, DreamWorks owners had best cross their fingers and hope for a buyout -- because as things stand now, with DreamWorks operating on its own, the stock simply is not worth what investors are paying for it.

I say this not just because the P/E seems frightfully high for this company (25 times earnings, versus 17% projected long-term growth). I say this because the closer you examine DreamWorks' valuation, the worse it appears.

Take the P/E, for example: It's based on the $151 million DreamWorks earned last year, right? Problem is, DreamWorks isn't always that profitable, and has in fact averaged earnings 17% below that level over the past five years.

Or consider the more forgiving metric of free cash flow. Dreamworks generated just under $100 million in free cash flow last year, but has averaged closer to $174 million per year over the last five years. That's enough to push the valuation down to 22 times average FCF production -- which to my mind is still too high a price to pay for the 17% growth analysts predict -- and way too much to pay for a company with the unstable revenue streams seen at a movie studio.

Foolish takeaway
I realize that within the fetid swamp of overpriced equities that is the film industry, DreamWorks smells slightly less stinky than the moderately overpriced Disney, or the up and down but usually profitless wonder that is Lions Gate. But relative valuation alone isn't enough to make DreamWorks bloom like a rose -- or smell as sweet.

Fact is, if you're looking for a bargain in filmmaking, I believe you're far better off taking a gander at someone like Time Warner (NYSE: TWX  ) , whose 14 P/E (17 if you exclude some extra items), 13% growth rate, and near-3% dividend yield seem positively attractive by comparison. But as for chasing DreamWorks higher, in hopes of cashing in on a buyout? Sorry. I like the Shrek movies, folks, but I'd rather kiss a frog than sink money into DreamWorks.

Disagree? Feel free. Click over to Motley Fool CAPS now, and tell me why I'm wrong.

Motley Fool CAPS: It's fun, it's free, and it just might make you famous.

Fool contributor Rich Smith does not own shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 621 out of more than 150,000 members.

Walt Disney and Coca-Cola are Motley Fool Inside Value recommendations. Walt Disney and DreamWorks Animation SKG are Motley Fool Stock Advisor picks. Coca-Cola and PepsiCo are Motley Fool Income Investor recommendations. Motley Fool Options has recommended a diagonal call position on PepsiCo. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


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