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Rocket Stock or Dud?

By Rich Smith – Updated Apr 5, 2017 at 8:02PM

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The bigger they are, the harder they (might) 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, 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. In our Motley Fool CAPS investing community, these top stocks usually enjoy favorable ratings, since everyone loves a winner. But what should you do when some of CAPS' smartest investors pan one of these hot stocks?

For starters, consider using the "52-week high" list as a starting point for further research. Stocks can rise for many reasons, but a little help from Motley Fool CAPS can make it easier to figure out how worthy those reasons are. Let's see what the more than 120,000 stock gurus (and counting) in CAPS have to say about the list's latest contenders:


One Year Ago Today

Recent Price

CAPS Rating

(5 max):









Five stars = highest possible CAPS rating; one star = lowest. Companies are selected from the "52 Week High/Low" lists published on on Saturday of last week. One-year-ago and recent prices provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

Everybody loves a winner
So they say. And yet, across the length and breadth of three stock exchanges -- the NYSE, AMEX, and Nasdaq -- we've got a grand total of two (count 'em, two) stocks hitting high notes this week. Very little to love about that.

Now, one of these two I'm sure you've heard of by now. We've written about Cogent no less than six times in the past month alone. I rather expect that if I spill just one more drop of virtual ink about this company, our poor readers will drown. Not so with DoCoMo. As far as I can tell, we haven't said word one about Japan's leading light of telecom in at least six months. And now that we finally do write about it, here I come a-bashing.

Well, nobody said life was fair. Without further ado, let's dive right into ...

The bear case against NTT DoCoMo
Three Fools have stepped up to the plate, and tempted fate, by challenging the buying frenzy that has lifted DoCoMo to its present height. In order, they are:

  • GoodOmens, who retains CAPS All-Star status despite taking a sizable hit betting that "this stock is going to slow down for a bit" last year. GoodOmens wasn't impressed with DoCoMo's "rising sales-promotion costs to attract customers as competition in Japan's mobile-phone-services market heats up," and predicted (so far, wrongly) "high costs and sinking operating profit."
  • Last (year) but not least, NetscribeInterna criticized DoCoMo's anemic sales growth in fiscal 2007, echoing GoodOmens' concerns that "increased sales promotion expenditure incurred by the company amid ... intensifying competition" would wreck the company's profits.

But NetscribeInterna, too, appears to have been caught wrong-footed -- twice. First, anemic sales growth turned into an outright decline. Regardless, DoCoMo has cut its operating costs significantly in each of the past two years, with the result that operating profits are -- well, far from sinking, they're rising quite swimmingly.

No two ways about it, the bears are at bay on DoCoMo these days -- but I doubt they'll stay that way for long. DoCoMo's demonstrations of cost-cutting acumen notwithstanding, I've got to bet on the bears this time. Here's why.

Buy the numbers
Right now, DoCoMo sells for a P/E of 12. Analysts who follow the company agree that over the next five years, the company will be lucky if it can grow its earnings even 4% per year.

Right off the bat, that looks unfavorable. AT&T (NYSE:T) and Verizon (NYSE:VZ) both sell for similar P/Es, yet carry projected growth rates in the 6% range. Qwest (NYSE:Q) shares carry growth expectations equal to DoCoMo's -- but sell for half the price multiple! As an added bonus, these three major American telecoms pay dividends ranging from 5.7% to 10.7% in yield -- whereas DoCoMo pays only a 2.8% yield. Given the choice, I see no rational reason for a U.S. investor to choose to own distant DoCoMo over cheaper, faster-growing, dividend-rich American alternatives.

For that matter, DoCoMo is also the red-headed stepchild of the telecom industry internationally. I mean, seriously, folks, if you're dead set on investing abroad, and are convinced that telecom is the place to be, you'd be better off owning shares of faster-growing America Movil (NYSE:AMX), cheaper Telkom Indonesia (NYSE:TLK), or faster-and-cheaper Telefonos de Mexico (NYSE:TMX) than overpaying for DoCoMo.

Foolish takeaway
If these six other telecom companies are appropriately priced, then I can come to no other conclusion than that DoCoMo is overpriced -- and must inevitably fall. To me, no other outcome makes sense.

Time to chime in
But maybe you see something special in DoCoMo? Something I'm missing? If so, then here's your chance to set me straight. Click on over to Motley Fool CAPS and tell us why DoCoMo's a buy.

Motley Fool CAPS : It's fun, it's free, and it just might make you famous. 

Fool contributor Rich Smith does not own shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's ranked No. 1,213 out of more than 120,000 players.

Cogent is a Motley Fool Hidden Gems Pay Dirt recommendation. Telkom Indonesia and America Movil are Global Gains picks. Telkom Indonesia is an Income Investor recommendation. The Fool has a disclosure policy.

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