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 that 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:

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"
Um, apparently not. In fact, the inescapable conclusion we can draw from today's list is that Fools take an exceedingly jaundiced view of the high-flying state of the market in general -- and of the kinds of stocks that are getting bid up in particular.

The top-rated stock on today's list, Neutral Tandem, gets only a middling three-star rating from the investors who've reviewed it. (A conclusion, I suspect, that owes to the fact that even the company's superb growth prospects cannot possibly justify its high price.) And yet, the stock that interests me most here is one that gets only two stars.

The bull case for Pegasystems 
Pegasystems -- now there's a blast from the past. Way back in 2003, this little provider of business process management software became one of the very first recommendations of the new Motley Fool Hidden Gems small-cap investing newsletter. Little did we expect that, in selling for a small loss in 2005, we'd be exiting near Pegasystems' all-time low -- or that four years later, the stock would be fetching nearly three times what we originally paid for it.

Oh well, live and learn. In that spirit, let's see what we can learn from what Fools are saying about Pegasystems today:

• Nearly two years after we sold out of it, CAPS All-Star jje100 saw an opportunity to ride the stock's rebound, noting that "customer satisfaction is high and there's plenty of market growth. Compared to competitors it's an easy-to-understand and easy-to-use product."
• Fast-forward to November 2008, and fellow All-Star rkumar02 climbed aboard with the notation: "This one really has started building the momentum and now has a significant part of the revenue from maintenance and service."
• Speaking of the new business model, NetscribeTech had a few things to say about it in January 2007: "Pegasystems is a software supplier catering to the Business Process Management (BPM) software market. ... The company develops, licenses, services and markets software that is used to manage complex and changing business processes in an organization. The company uses direct sales channel and associated with top notch IT consultant companies like [Accenture (NYSE:ACN)] and EDS [now owned by Hewlett-Packard (NYSE:HPQ)] to market its products and services. The products mostly cater to the financial and health care verticals and largely restricted to the U.S." Pegasystem's customer list now boasts such A-list names as Citigroup (NYSE:C), General Electric (NYSE:GE), and WellPoint (NYSE:WLP).

Name-dropping aside, there's a lot to like about Pegasystems today -- maybe even more than when we originally recommended it.

Cash generation, for example. Over the last 12 months, Pega generated some $34.3 million in free cash flow, or more than three times its reported earnings under GAAP. In evaluating the stock today, I'd suggest you look past the rather lofty 64 price-to-earnings ratio, and focus instead on Pega's much more reasonable-sounding enterprise value-to-free cash flow ratio of 15.

Whether you think that's a fair price to pay for the company today probably depends on how fast you think the company can keep growing -- and right now, that's an exercise in guesswork. Only one analyst still follows Pegasystems on Wall Street, and while this worthy analyst tells us the company will boost its earnings 47% next year, he (or she) makes no promises as to the company's long-term prospects.

That said, with Pegasystems' current valuation looking entirely reasonable, and the firm sitting on $167 million in cash -- and no debt whatsoever -- I think it's safe to say that even if it fails to grow at 47% forever, with this much cash to cushion it, Pegasystems is going to come out of this recession just fine, and continue in business for a good long time.

Time to chime in
Of course, that's just my opinion -- I could certainly be wrong. And that's where you come in. Here at the Fool, we welcome contrary opinions. So if you see something that could clip Pegasystems' wings, click on over to Motley Fool CAPS and give us a holler. (Just please don't tell us that you "told us so.")

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