Get Ready for the Fall?

"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:

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.

A sigh of relief ... and then a roar
As fears of a Greek debt meltdown continue to fade, traders have released their white-with-fear grip on their Bloomberg terminals, markets have given a sigh of relief -- and stocks have turned cautiously green again. Buyers are back in the market, and some of the biggest names in stock-picking are once again hitting 52-week highs.

Curiously, though, the top-ranked stock on today's list is ... the very same company occupying the very same place on the very same list two months ago: Emerson Electric. Coincidence?

If so, it's a happy one. Because as we're about to see, even though Emerson's seems more expensive (having risen 8% since it last led this list), it's actually an even better deal today than it was two months ago.

The bull case for Emerson Electric
Let's review. Back in January, we heard CAPS member Sadalmelik praise Emerson for producing "[g]ood steady income" and keeping its balance sheet healthy throughout of the Great Recession.

Vaelon called Emerson a "[w]ell managed company which has consitently delivered growth and will continue to do so. Collect the dividend while you wait." And alfred13 predicted that Emerson would: "do disproportionately better as the economy improves."

Ride that bull!
So far, so good. Over the two months since I last presented the bull case for Emerson, the stock has indeed outgrown the market "disproportionately" -- up well over 8% against a mere 0.5% rise for the S&P 500. But does that mean all the profits here have already been earned? Is the stock doomed to fall back in line with the broader market?

Hardly.

Consider: Emerson's market cap may have increased as its stock price rose, but the fundamentals underlying this growth are sound -- and make Emerson a better bargain than ever. Over the past 12 months, this company has generated $3 billion in free cash flow (versus the $2.6 billion it was clocked at two months ago.) So while its market cap has risen to $36.5 billion, this still works out to an eminently defensible valuation of 12.2 times free cash flow. Not at all unreasonable in light of the stock's 11.9% projected growth rate, and its hefty 2.8% dividend yield. (Right in line with the yields on offer at rivals General Electric (NYSE: GE) and Honeywell (NYSE: HON), I should add.)

Time to chime in
Does Emerson's "high" stock price mean the stock is doomed to fall? I didn't think it did two months ago (and I was right), and I don't believe it will now.

But feel free to correct me if you think I'm wrong. In fact, I'm so certain about this one, that I'll even provide you a soapbox to stand on. Shout away.