"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. And 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.
CAPS Rating (out of 5)
Philip Morris International
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.
When a stock hits a new 52-week high, it's only natural to wonder whether this time is the last time -- whether there's nowhere left to go but down? And really, because no company is perfect, there's always at least a chance that will happen.
Fact is, if you look hard enough, you can find a flaw in any stock. For example …
- Sandridge Energy has a hefty debt load, pays no dividend, and sells for a lofty PEG ratio of 2.3.
- Williams carries even more debt than Sandridge, and while Yahoo! Finance says it's projected to grow profits at 17.4% per year over the next five years, Williams has actually lost money over the past 12 months.
- Verizon shares cost more than 41 times earnings, and the company could soon lose its rank as the nation's biggest telecom, if AT&T
(NYSE: T)succeeds in buying T-Mobile.
- Philip Morris … [insert anti-tobacco diatribe here.]
Yet Fools on balance still find more positives than negatives at these companies, each of which enjoys an above average four- or five-star rating on CAPS. As it turns out, the only stock making today's list that fails to win support from Foolish investors is the one that's won an official recommendation from Motley Fool Stock Advisor.
Incidentally, Priceline.com is also one of the best-performing stocks on the Stock Advisor scorecard -- up an astounding 1,954% in value since we first recommended it seven years ago. So why do investors doubt its ability to keep on outperforming?
Mainly, it's the price. CAPS member CraigMiles boggles at the stock that costs "~$420 for earnings going forward" and adds: "I don't think so. I think [Priceline] is outrageously over-valued."
All-Star investor TheBarnacle agrees, citing the stock's high multiples to earnings, sales, and book value as evidence of the stock's overvaluation. At prices like this, argues fellow All-Star Chemdawg, the Law of Gravity has to come into play eventually: "At some point it just has to be too expensive and I think this is that point."
What price success?
As for me, though, I'm not so sure. Oh, I understand why investors might balk at paying a current price tag of 47 times earnings and 32 times free cash flow -- especially when analysts expect the company to grow at "only" 22% per year over the next five years. (Of course, that's still faster than either Orbitz or Expedia
What's more, between 2007 and 2008, Priceline doubled its operating cash flow. Cash flow rose 60% again from 2008 to 2009, and then 52% from 2009 to 2010. So while the growth rate is decelerating. it's not falling nearly fast enough to bring the stock down to a 22% velocity in even five years' time.
Meanwhile, capital expenditures have remained remarkably constant at Priceline. For five years in a row, capex more or less held steady between $10 million and $20 million before finally breaking above $20 million in 2010. The result: I suspect that the 22% figure analysts keep bandying about might turn out to be too conservative.
Time to chime in
So yes, 32 times FCF may be a price too high for 22% growth. But if Priceline can grow faster than that, it's entirely possible the stock won't fall at all. Or at least that's my opinion. What's yours?
Priceline.com is a Motley Fool Stock Advisor pick, but Rich Smith owns no shares of any company named above, nor is he short 'em. The Fool owns shares of Philip Morris International, which is a Motley Fool Global Gains selection. You can find Rich on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 541 out of more than 170,000 members.
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