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 52-week highs. And every day, investors read the list and tremble -- some with greed, others with terror. In our Motley Fool CAPS investing community, these top stocks usually enjoy favorable ratings, because 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.

Knives and knaves
And indeed, this week we see only two companies on the list enjoying widespread support in CAPSdom. Ross and Stanley Furniture are undoubtedly suffering from pessimism about consumer confidence, and DynCorp from persistent (and in my view, ill-founded) fears that President Obama will downsize the military and surrender to the Nazis while calmly sipping Vichy water.

(DynCorp and Fluor (NYSE:FLR) just won potentially $15 billion in work building Army bases in Afghanistan, swiping the contract from previous owner KBR (NYSE:KBR).)

No matter. There are still two companies on our list that have investor support. Between them, I think Motley Fool Rule Breakers recommendation SXC Health Solutions sports the more compelling valuation, which is why today, we'll be examining ...

The bull case for SXC Health Solutions

• CAPS All-Star NetscribeSoftwre introduced us to this company back in 2007 as a provider of "pharmacy benefit management services and software products to different variety of customers in the pharmaceutical supply chain" -- everyone from CVS Caremark (NYSE:CVS) to the University of Michigan. NetscribeSoftwre also includes "managed care organizations, blue cross organizations and government agencies" among its clientele.
• Fellow All-Star investor fladoy argued earlier this year that "the firm should benefit from the new administration's commitment to digitizing health care records." (Although it'll need to contend with another of our recommendations -- Stock Advisor pick Quality Systems (NASDAQ:QSII) -- to do that.)
• Last but not least, SIP08USU offers an even bigger-picture analysis of the situation: "SXC Health Solutions is one of the leading stocks in a leading industry. ... They are a great company that will capitalize immensely from our very large, aging, baby boomer population."

Hard to argue that our elders will not get older. (And as the saying goes, it beats the heck out of the alternative.) So as macro theses go, that seems to be a strong one. The question, though, is whether the valuation looks good. Can we capitalize on this trend at a favorable price?

One word: Yes
Oh, I admit that with a P/E in the mid-30s, SXC Health Solutions isn't the most obvious "value stock" on the planet. But dig a little deeper, and I think you'll like what you see here.

Over the past 12 months, SXC Health Solutions has generated more than $36 million in free cash flow -- nearly twice what it reports as "earnings" under GAAP. That works out to an enterprise value-to-free cash flow ratio of just over 17, which tallies up right nicely relative to annualized five-year growth projections of 18.5%. SXC Health Solutions carries more than $30 million in net cash on its balance sheet.

Time to chime in
To me, the company doesn't just look fairly priced -- it's actually trading at a bit of a discount to its intrinsic value. While I personally wouldn't mind seeing the margin of safety on this one expand just the wee-est bit before buying in, the price looks nice enough as is. In short: I see no reason why SXC Health Solutions must fall from its present 52-week high. And in fact, I see no reason why it cannot trade higher still.

Of course, the aim of this column isn't just to tell you what I think about SXC Health Solutions -- or for that matter, even what our CAPS members think. What we really want to know is whether you would buy it at today's 52-week high. If so, click on over to Motley Fool CAPS and tell us why (or why not.)

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