Which Stock Falls First?

"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, finviz.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 selected by screening for new 52-week highs hit on the Thursday before publication. Low and recent price provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

Whenever a stock hits new 52-week highs, investors naturally wonder how long the good news can keep coming, the Law of Gravity being what it is. Still, CAPS members seem unconcerned about the valuations on most of the stocks making up this week's list.

Taking a quick look at the numbers, I find myself agreeing with our CAPS community on the majority of these picks. I say "the majority" because the 17 P/E at United Technologies is a bit rich for my blood. To justify that price, UTC will have to grow a heckuvalot faster than the 10% Wall Street projects for it.

On the other hand, at 13 times earnings, a projected 10% growth rate, and paying a 1.5% annual dividend, Texas Instruments doesn't look at all unreasonably valued -- yes, even today, sitting at its 52-week high. Likewise UnitedHealth with its list-low 10 P/E ratio, 10% growth rate to match, and modest 1.2% divvy. Why, even Suncor at 24 times earnings looks attractive! Sure, 24 times earnings is a pretty steep price to pay. But if the analysts are right, and Suncor can grow its earnings in excess of 28% per year for the next five years, the stock's an out-and-out bargain at today's price.

So yes, by and large, our CAPS ratings look on the mark this week -- including for the single stock Fools vote most likely to fall: the widely panned Discover.

The bear case against Discover Financial Services
Relatively few CAPS members have volunteered reasons for hating Discover in recent months. The most recent "bearish" comment we have on record for the company dates from September 2009, when Mrpresident77 predicted "earnings are coming up this next week and i have some bad news..." (For the record, when earnings did finally come out, it was bad news for Discover shorts -- the company crushed analyst estimates, reporting a $0.52-per-share profit. Doh!)

So what's to say Discover won't surprise us again this year? I mean, yes, American Express (NYSE: AXP) had a rough time of things when it reported earnings earlier this month. But just one day later, Capital One (NYSE: COF) turned around and beat the pants off earnings estimates. So what makes me think Discover Financial is more like AmEx than CapOne?

One word: valuation
Honestly, folks, I do not know what will happen when Discover next reports earnings. (They're due out in March, by the way.) I do know, though, is that if analysts are anywhere near right about where this company is going -- or even if they're off by a mile -- the stock looks woefully overvalued at today's share price.

Consider that its 17 P/E only ties Discover with UTC for second-most-expensive stock on this week's list. But Discover comes out a winner (read: "loser") on two other metrics: It's got the tiniest dividend yield on the list (0.4%) and the slowest growth rate (less than 6%.) Hmm.

Time to chime in
Call me a pessimist, call me a Fool, but "slow and stingy" aren't normally traits I look for when asked to pay a high price on a stock. And that is why out of all the stocks on this week's list, Discover Financial Services gets my vote as the stock most likely to fall first.

Of course, that's just my opinion -- you are certainly free to disagree. In fact, if you do disagree with me on Discover Financial, here's your chance to set the record straight. Click over to Motley Fool CAPS now, and tell us why Discover is a buy. We're waiting.