Sometimes, stocks rise for a reason. But other times, investors get mired in a momentum mind-set, and that rise becomes the reason. Sadly, even a great company can turn into a lousy investment if its price reaches too great an altitude -- and a shaky company can become an outright disaster.
Below, I list a few stocks that may have flown too close to the sun. According to the smart folks at finviz.com, these companies shares have nearly or entirely doubled over the past year, leaving them potentially poised to fall back to earth.
National Oilwell Varco
Companies are selected by screening for 100% and higher intraday price appreciation over the last 12 months on finviz.com. Current pricing provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.
The world's insatiable demand for energy has three energy stocks riding high. Together, shares of Golar LNG, Halliburton, and National Oilwell Varco have gained more than 430 percentage points in value over the past 12 months … and outperformed the S&P 500 by 367%.
[Pause for applause.]
Each of these stocks has done well over the past year, but which one will do best for the rest of 2011?
According to CAPS member HardnoseDotCom, Golar LNG's "low PEG, strong price uptrend" make this stock the best bet for your portfolio. All-Star investor eksummers620 counters with a quote from "Morningstar analyst Stephen Ellis" (a Fool alum, by the way), who argues that oil services companies such as Halliburton are "set up for some very healthy growth rates in the later stages of 2011 and early 2012."
And yet, if that's true for Halliburton, it may be doubly true for National Oilwell Varco -- like Hally, a play on oil demand, but with the added bonus of receiving the Fool five-star treatment on CAPS …
The bull case for National Oilwell Varco
CAPS member mitleg calls National Oilwell "a fantastic company," and goes on:
The leader in their field. With the ongoing turmoil in the middle east, and the upward pressure that the improving economy will put on oil prices it should continue to rise. It's forward growth is excellent.
bizcbug7 cites a growing "backlog of orders" and calls the company "a juggernaut." (Granted, Halliburton is bigger, Schlumberger
Best of all, National Oilwell bulls argue that the company's 18 P/E ratio and 12% long-term growth estimates make the company cheap. Ace CAPS investor rexlove cites the company's "low peg" as reason No. 1 for owning National Oilwell Varco.
And to be fair, he's got a point. 18 times earnings does look attractive relative to, say, the 21 P/E at Hally, the 24 times earnings that Schlumberger shares cost, the 29 times ratio at Baker Hughes, and most amazing of all, the near-900 P/E ratio at Weatherford. But is National Oilwell cheap enough to own?
Valuation: It's (not) all relative
I say no, and for two reasons. First and most obviously, 18 times earnings may be cheap-er than the alternatives, but it doesn't look cheap enough if all National Oilwell produces is the 12% growth rate that analysts expect of it. (And historically, their estimates haven't been too far off the mark.) I fear our CAPS members may be getting distracted by the even more inflated prices investors are paying for National Oilwell's competitors -- and ignoring the possibility that all these stocks are overpriced.
It seems even more likely when you look closely at National Oilwell in particular. As I say, the stock's overvalued on its face from a pure PEG perspective. But dig into the numbers and the story gets even worse. Over the last 12 months, National Oilwell reported "earning" $1.65 billion in profits. Its actual free cash flow for the period, however, was a mere $1.14 billion -- 31% lower than reported profit under GAAP.
Time to chime in
As a result, the same stock that looks richly valued at 18 times earnings appears even more overpriced at a price-to-free cash flow ratio of nearly 27. My prediction: this one-time high flying oil stock will be a dud of an investment for new buyers. I wouldn't touch it with a 10-foot dipstick.
Disagree? Feel free. Click over to Motley Fool CAPS now, and tell me why I'm wrong.
Fool contributor Rich Smith does not own (or short) shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 507 out of more than 170,000 members.
The Motley Fool owns shares of Schlumberger and Motley Fool newsletter services have recommended buying shares of National Oilwell Varco. Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.