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:

Company

Recent Price

CAPS Rating (out of 5):

Bull Factor

Covidien (NYSE: COV  )

$54.46

****

95%

Liberty Entertainment  (Nasdaq: LMDIA  )

$27.45

*****

93%

Alpharma (NYSE: ALO  )

$34.42

****

91%

Piedmont Natural Gas  (NYSE: PNY  )

$28.75

****

86%

Transforma Acquisition 

$7.91

Not rated

50%

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

Everybody loves a winner
... assuming, of course, that they've heard of the winner. For the first time ever, an unknown stock has sneaked its way onto our list. But the fact that no one's heard of Transforma Acquisition isn't particularly surprising. While it's trading at its highest levels ever, its version of "ever" is unusually brief. This "blank check company" has only been in existence for about 20 months, and it's still not doing anything particularly interesting.

Not so for our other contenders. Medical devices, cable TV, pharmaceuticals, and gas -- we've got a little bit of everything this week. Top marks among Foolish investors go to Covidien, a former Tyco (NYSE: TYC  ) subsidiary and creator of "innovative medical solutions" (mainly medical devices and supplies) that pulls $9 billion in annual revenue. Here's why Fools think that this stock, already topping its 5-year chart, has more room to run:

The bull case for Covidien
Writing not long after its spinoff last year, CAPS All-Star kristm was: "... Looking at this company like a caged bird freed. Away from Tyco it has potential to really soar."

That take was swiftly contradicted by McPicker, who predicted that Covidien: "Will be bought within 2 years... Look for [Johnson & Johnson (NYSE: JNJ  ) ] to buy it." McPicker then proceeded to contradict McSelf, suggesting that if Covidien doesn't get bought, it could instead "be a buyer of some [Boston Scientific (NYSE: BSX  ) ] assets which would make a neat combo with [Covidien]."

Buyer or buyee, cuin103 believes it will make no difference. In April, this CAPS member wrote of Covidien:

Great player in health care with strong product line, and development pipeline. Innovator and growing marketshare. As minially invasive surgery continues to grow with robotics as the next "me to" must have this baby can only go UP!

So far, so good. Each of our three featured pitchers is glowing bright green on the CAPS scoreboard, profiting handsomely (if virtually) from their endorsements of Covidien. But will they still be in the green this time next year?

At first glance, the prospects don't look good. At its current levels, Covidien is staring down at us from a nosebleed 28-times-earnings multiple, despite analysts expecting only 8% long-term growth out of the company.

The second glance doesn't look much better. Free cash flow petered out at just $350 million over the past 12 months, barely a third of net income. Longer-term, it looks like this ex-Tyco division generated about $1.6 billion per year, on average, between 2005 and 2007. Give the company the benefit of the doubt, and assume that it will return to these cash-generating ways, and you're still looking at a stock priced at about 17 times such hypothetical cash flow.

Personally, I'd want to see a whole lot more than 8% growth from the company before paying that kind of multiple to earnings (cash or otherwise). Sorry, Fools. I hate to burst your bubble, but I just don't see any margin of safety whatsoever in this one.

Time to chime in
Of course, I've been wrong before. According to CAPS, I barely get three picks out of five right. If you think you can do better, come on over to Motley Fool CAPS and give us your take on Covidien.

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

Johnson & Johnson is a Motley Fool Income Investor pick. Tyco International is a Motley Fool Inside Value recommendation.

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. 606 out of more than 115,000 players. The Fool has a disclosure policy.


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