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Which Stock Falls First?

By Rich Smith - Updated Apr 6, 2017 at 9:49PM

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The bigger they are, the harder they (might) fall.

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:

Company

 

52-Week Low

Recent Price

CAPS Rating

(out of 5)

Abbott Labs (NYSE: ABT) $44.59 $53.49 *****
Amgen (Nasdaq: AMGN) $50.26 $60.47 ****
Elan Corp (NYSE: ELN) $4.25 $8.46 ****
American Capital Agency (Nasdaq: AGNC) $24.06 $29.62 ****
Amazon.com (Nasdaq: AMZN) $105.80 $202.56 **

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:

  • Abbott Labs, while it pays a decent dividend and carries a P/E lower than other Big Pharma alternatives such as Pfizer and Merck, still seems pricey in light of its single-digit growth rate.
  • The situation is similar with Amgen. Sure, a 12.6 P/E doesn't look expensive ... until you see the stock is expected to post sub-7% earnings growth for the next half-decade. And Amgen doesn't pay any dividend at all!
  • As for the other healthcare stock on today's list … Elan's job seems to be making the other drug companies look good by comparison. No dividend here -- and no profits, either.
  • American Capital? It's "American" in so many ways -- foremost among them, its back-breaking debt load -- $22.2 billion in debt.

Yet Fools on balance find more positives than negatives on all four companies, each of which enjoys an above-average rating on CAPS. In contrast, one of the most admired companies on the planet is currently stuck with a two-star rating on its stock. What is it, exactly, that has Fools so down on Amazon.com?

The bear case against Amazon
In a word: Price. CAPS member LWILLS describes the dilemma:

"Don't get me wrong - I love Amazon and am a loyal customer. That being said, I can't get past their valuation. I have never downthumbed a company before, but to me it is obvious that this stock is way overvalued."

LWILLS is not alone. The price is also keeping guzclues1996 away: "I love [Amazon] but i don't love it enough to put money into an overvalued company."

And belying his name, CAPS member "bobbyabull" is also bearish: "Current p/e, forward p/e and PEG are all too high for me anyway. No dividend either."

And what can I say? I'm with the Foolish majority on this one. With only $1.05 billion in trailing profit to its credit, Amazon currently sells for 87 times earnings -- a high price to pay even if the company achieves analysts' projected 28% long term growth rate. (And if it falls short …?) True, there's more to the stock than just its P/E. Amazon generates nearly twice as much free cash flow annually as it reports as "net earnings." Still, the stock's price-to-free cash flow ratio of 48 seems pricey to me.

By way of comparison, rival e-commerce company Overstock.com (Nasdaq: OSTK) costs only 33 times earnings, and is growing nearly as fast as Amazon (20% annual growth projected.) Slower growing eBay (Nasdaq: EBAY) is even cheaper --  just 24 times earnings. And in case you're wondering -- yes, just like Amazon, both these companies also generate free cash flow far in excess of their reported earnings.

Foolish takeaway
A wise Fool once told me that when investing in stocks, valuation matters. The trouble with Amazon isn't its business (which is great.) The trouble is that the stock just plain costs too darn much.

Or at least, that's my opinion. But don't just take my word on it. Click over to Motley Fool CAPS and tell us what you think.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$3,437.36 (-0.18%) $-6.36
AGNC Investment Corp. Stock Quote
AGNC Investment Corp.
AGNC
$15.46 (2.38%) $0.36
eBay Inc. Stock Quote
eBay Inc.
EBAY
$67.48 (1.00%) $0.67
Overstock.com, Inc. Stock Quote
Overstock.com, Inc.
OSTK
$84.62 (-0.09%) $0.08
Abbott Laboratories Stock Quote
Abbott Laboratories
ABT
$128.38 (1.29%) $1.64
Amgen Inc. Stock Quote
Amgen Inc.
AMGN
$201.17 (0.18%) $0.37
Elan Corporation Limited Stock Quote
Elan Corporation Limited
ELN

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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