"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:
International Business Machines
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 a new 52-week high, 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 have to say I agree with our CAPS community on at least two of these picks. At 14 times earnings, a projected 11.5% growth rate, and paying a 1.7% annual dividend, IBM doesn't look at all unreasonably valued; even today, sitting at its 52-week high. Likewise Chevron with its very modest 11 P/E ratio, 3.1% dividend, and projected 19.5% (!) long-term growth rate. If that growth pans out, Chevron looks very attractive indeed.
In contrast, GE and Oracle look somewhat less attractive to me. Both sport P/E ratios in the low 20s, alongside growth rates in the low teens. Of the two, I probably prefer GE for its superior dividend yield (3%), but with Oracle expected to grow much faster, I can certainly understand why some Fools would choose that stock's growth over GE's income.
Last but not least, we come to Starbucks. With its shares up 45% in 52 weeks, Starbucks' quick ascent seems to be making a lot of Fools nervous. With just two CAPS stars, the stock's literally half as well-liked as the other stocks on this list. But does this mean Starbucks will soon fall to earth?
Let's find out.
The bear case against Starbucks
On the more pessimistic side of the spectrum, CAPS member wkuehnle warns us that "with its high PE and complete over expansion [Starbucks] is ripe for a fall. Its outlet sales located in [Barnes and Noble
Slightly less dour is the view from CAPS member joecourt, who worries that Starbucks has already "successfully saturated the market ... while they have upper and upper middle class business they don't really have anywhere else to go. I don't see it falling apart but I don't think they have much growth left, if any."
One Fool's view
That's my view of the company, too. I'm not particularly afraid of Starbucks at today's prices -- but neither am I "trembling with greed," as the saying goes, at the prospect of owning this stock.
Indeed, selling for 27 times last year's earnings, I'm almost inclined to agree with the naysayers who argue Starbucks' stock looks a little expensive today. But consider: The $1.3 billion in free cash flow that Starbucks generated over the past 12 months exceeds reported "net income" by fully 33%. The resulting 19.5 price-to-free-cash-flow ratio actually looks pretty reasonable relative to Starbucks' 16.6% projected long-term growth. Stir in a tidy 1.6% dividend yield and the stock looks priced just about right.
Time to chime in
Of course, that's just the problem. As a value investor, I'm not really interested in owning stocks that are fairly priced. I want to buy an out-and-out bargain. So while I won't go so far as to say Starbucks is primed to fall from today's 52-week high, I would say the stock's looking a mite stale today. Given my druthers, I'd brew a fresh pot and start looking elsewhere for value.
Of course, that's just my opinion. What do you think? Tell us about it on Motley Fool CAPS.
Rich Smith does not own shares of any company named above, nor is he short 'em. You can find Rich on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 627 out of more than 170,000 members. The Motley Fool has a disclosure policy.
Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.