As a stock price bumps up against its year-long high, some investors may shy away, thinking there's limited upside -- and rightfully so in some cases. However, a strong share price run-up doesn't necessarily mean it's too late to get onboard.
With that in mind, we asked three Fool contributors to each select a stock that still makes sense for long-term investors, despite their "high" valuations. Hasbro (HAS 0.22%), Facebook (META 1.54%) and Markit (INFO) are all worth consideration.
Rich Duprey: (Hasbro): For toymaker Hasbro, everything is awesome! Maybe stealing a line from its rival's film The Lego Movie is a bit much, but there's good reason to be excited about both the near future and longer time horizons.
Perhaps most promising is that Disney (DIS -0.45%) turned over the Frozen toy franchise to Hasbro, which was previously handled by archrival Mattel (MAT 0.67%). The movie generated almost $1.3 billion in worldwide box-office receipts for Disney, with more than $400 million in domestic receipts, and it quickly became the top-grossing animated film of all time. Its sequel could be even more of a monster hit, possibly generating as much as $1.5 billion in box-office revenues.
But Hasbro has a deep bench of its own to draw on. Its boy's segment, for example, languished throughout 2013, but rebounded last year. In the fourth quarter, it posted 20% revenue growth on the strength of evergreen franchises like Transformers, Nerf, and Marvel, which offset weakness in other divisions like games and girls. It was Hasbro's girl's division, with brands like My Little Pony and Littlest Pet Shop, which helped carry the toymaker when the boy's division was stumbling.
Hasbro's stock is valued at almost 20 times earnings, but just 16 times next year's profits, with analysts expecting it to be able to grow earnings at better than 10% annually in each of the next five years. Mattel is valued demonstrably lower, at 16 and 14 times earnings and estimates, respectively; but Wall Street expects earnings to expand at half the rate of its rival.
Hasbro is also able to turn every $1.00 of revenue into $0.15 of operating profit compared to $0.12 with Mattel, and only $0.04 at JAKKS Pacific (JAKK 0.72%), which might otherwise seem more attractively valued, but lacks the depth and breadth of Hasbro's portfolio. As a result, investors shouldn't expect Hasbro's achievement of a new 52-week high to impede its stock from making further gains.
Tim Brugger (Facebook): The social-media king has been on a nice roll the past few months, as evidenced by its nearly 9% jump in share price. Though Facebook's stock is not quite at its 52-week high, it's close, and getting closer with each passing trading day. Even at Facebook stock's current levels, there are multiple growth drivers poised to keep the company on track to $100 a share. This should keep investors excited, even those who haven't as yet jumped onboard.
It was welcome news that Facebook finally took the wraps off its video advertising testing and is now rolling it out to the masses. At a cost of $1 million a day to simply test video ads on Facebook, it's clear that its marketing partners love the notion, and the revenue opportunities are nearly limitless. That's the good news for fueling growth in 2015. The even better news is that there are still more paths to revenue growth ahead.
WhatsApp is poised to break through the 1 billion monthly average user, or MAU, barrier by the end of this year. It now offers its users a voice-calling feature, and Facebook hasn't even scratched the surface of the messaging app's undeniable revenue possibilities.
There was some head scratching when Facebook spent $2 billion for virtual reality, or VR, headset-manufacturer Oculus a year ago, but it could turn out to be absolute steal. According to one report, VR is expected to become a $150-billion industry in five years, and Facebook is at the forefront.
Toss in the limitless potential that fast-growing Instagram adds to Facebook's list of growth drivers, and the future looks bright indeed, regardless of Facebook's "inflated" share price.
Alex Dumortier: (Markit): All things being equal, I'd prefer to buy shares that are trading near their 52-week lows than their 52-week highs; but in the real world, "other things" are rarely equal. Furthermore, investors need to convince themselves that, in isolation, price says little about the investment merits of a stock -- it's the relationship between price and intrinsic value that is determinant. In that context, I offer up data-provider Markit (INFO), which closed at $27.15 on Tuesday, just 1% shy of its 52-week high of $27.42.
The financial-information provider went public to little fanfare at $24 per share last June. At the time, I called it a "Buffett-like company," and stand by that moniker today -- certainly as far as the economics of the business are concerned. As the company itself explains, Markit has an "attractive business model" with high recurring revenue, strong organic growth, and high cash generation.
You needn't take the company's word for it, though: During the three-year period from 2011 through 2014, Markit's annual average operating cash flow margin was 36.7% -- more than three percentage points higher than the equivalent figure for profits locomotive Google.
Markit's shares are valued at 18.3 times its next 12-month estimated earnings per share -- a 19% discount to the median multiple for a group of 10 comparable companies. In fact, Markit's forward price-to-earnings multiple is lower than all but one of its peers: Dun & Bradstreet, at 16.8. With the S&P 500 trading at 17.0 times future earnings-per-share estimates, paying a small premium to own Markit shares is eminently reasonable. They look like an excellent bet to outperform during the next three-to-five years.
