In today's market, buying a rocket stock just before it takes a nosedive is every investor's worst nightmare.
Finviz.com publishes a daily 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:
Melco Crown Entertainment
Companies selected by screening for new 52-week highs hit on the Friday 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 its next step will be the proverbial "doozy." It could happen. Look hard enough, and you can find a flaw in any stock:
- UnitedHealth, while cheap enough at less than 12 times earnings, seems to live and die at the whims of government regulators.
- Melco Crown has put together a couple of profitable quarters, but hasn't yet proven it can remain profitable over the course of a full year.
- Kraft's got a boatload of debt -- and has come under criticism from Berkshire Hathaway
(NYSE: BRK-B)Chairman Warren Buffett for overpaying on its Cadbury acquisition.
Yet Fools on balance find more positives than negatives on all three companies, each of which enjoys an above-average four-star rating on CAPS. In contrast, this week we have not one, but two, companies enduring investor scorn. Which is more likely to lose value over the next 12 months? Dell or Yahoo!?
A lot of folks will tell you it's Dell that's doomed. The company was great back in the day, but lately the competition's been eating its lunch. First Hewlett-Packard figured out how to build personal computers on the cheap. Then Apple arrived, and took away Dell's bread and butter when it introduced tablet computers as an alternative to PCs. But personally, when I look at the company's still prodigious $3.5 billion in annual free cash flow -- a number 35% greater than Dell's GAAP earnings suggest -- I think Dell's doing just fine. Not so for Yahoo! (And I'm not the only Fool who thinks so.)
The bear case against Yahoo!
CAPS member owens4414, for example, sees no point in owning Yahoo! at all: "Most everything yahoo does, [Google] does better. Yahoo will hold on for a few years but I don't see too much long term potential in the company."
All-Star investor starbucks4ever adds: "These cuckoos cannot even make their mail server run reliably, so what do you expect?"
Meanwhile, MBahAhMooTeh points out that "Google has over 70% of the search engine market. Yahoo just over 14%. Bing is catching up with almost 10% and it is just going to get higher, taking away YAHOO market share."
Of course, if you've got to lose market share to someone, Microsoft
Eight months after the Yahoo!-Microsoft tie-up, promised synergies from outsourcing search functions to Bing have yet to appear. To the contrary, while operating cash flow has improved somewhat, Yahoo hasn't been spending less on capital costs; it's been spending more. As a result, the company's annual free cash flow of $536 million is still less than half of Yahoo!'s claimed $1.1 billion net "profit."
As a result, Yahoo! already looks pricey at 22 times earnings, but may be even more overvalued than it appears. Valued on free cash flow, the company's selling for closer to 49 times FCF. And either way you look at it, Yahoo!'s valuation seems stretched for a company that few analysts expect to grow faster than 13% or so over the next five years.
My advice: If you're looking for a company priced for perfection, failing miserably to achieve it, and likely to fall in consequence ... Yahoo! fits that definition to a "T."
But don't just take my word on it. Click over to Motley Fool CAPS and tell us what you think about Yahoo!.
Rich Smith owns shares of Google. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 490 out of more than 170,000 members. The Motley Fool has a disclosure policy.
Berkshire Hathaway, Google, Microsoft, and UnitedHealth Group are Motley Fool Inside Value choices. Google is a Motley Fool Rule Breakers recommendation. Apple, Berkshire Hathaway, and UnitedHealth Group are Motley Fool Stock Advisor selections. Melco Crown Entertainment and Yahoo! are Motley Fool Global Gains picks. Motley Fool Options has recommended a bull call spread position on Apple. Motley Fool Options has recommended a diagonal call position on Microsoft. Motley Fool Options has recommended a diagonal call position on UnitedHealth Group. The Fool owns shares of Apple, Berkshire Hathaway, Google, Microsoft, UnitedHealth Group, and Yahoo!. Alpha Newsletter Account, LLC owns shares of Microsoft.
Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.