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:
Johnson & Johnson
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:
- Take TransCanada, for instance. It's a Motley Fool Global Gains pick, true. But it's also one pricey stock, valued at more than 22 times earnings. It's also growing more slowly than U.S. rival Enbridge
. (NYSE: ENB)
- Novartis? Global Gains likes this one, too, and it does have a lower price-to-earnings ratio. On the other hand, it's expected to grow just half as fast as TransCanada.
- Johnson & Johnson? This perpetual favorite has been recommended by no fewer than five separate Motley Fool services. But as I explained last month, J&J's free cash flow isn't really up to snuff, and I think Merck
offers a more prudent alternative. (NYSE: MRK)
Lest you think I'm playing favorites, I can even raise some objections to the one stock on this list that I own, Veeco Instruments. The company sells for just six times earnings, but those "earnings" vastly overstate the actual free cash flow that Veeco is spinning off.
Yet despite all the strikes against these stocks, none of them polls quite as weakly as the sole single-starred stock on today's list. When you consider the obvious vulnerabilities of the also-rans above, what makes Fools believe that Crocs is the stock most likely to fall?
The bear case against Crocs
For the most part, recent CAPS comments on Crocs tend to favor the fashionistas. JackCaps dismisses the shoes as a "fading fad," while houstcarr just calls them a "dumb fad." If you're wondering why, SeeknDestry replies with the rhetorical question: "Have you SEEN them?"
Still, it is summer, and across the nation, pools are opening for business. Traditionally, summer's been the time people are most likely to be seen wearing the waterproof shoe. Now seems an odd time for Fools to be voting with their feet and kicking Crocs to the curb, don't you think?
Actually, judging by Crocs' numbers, these Fools' timing may be a lot better than it looks. At 24 times earnings, Crocs shares do appear to be richly priced relative to the 12.5% long-term earnings growth that Wall Street expects the company to produce. Worse yet, the company's sub-$60 million annual free cash flow tells us that Crocs' valuation may be even uglier than it appears. Valued on this metric, the company costs more than 32 times free cash flow.
Fools seem to agree that silly shoes plus an expensive stock price equal a stock doomed to fall. While I do think the numbers support that thesis, bear in mind that overpriced shares can remain overpriced for a whole lot longer than you think. In fact, Crocs shares have more than doubled in price over the past year.
The Motley Fool owns shares of Johnson & Johnson. Motley Fool newsletter services have recommended buying shares of Johnson & Johnson, Novartis, and TransCanada, and have recommended creating a diagonal call position in Johnson & Johnson.
Fool contributor Rich Smith owns shares of Veeco Instruments. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 516 out of more than 170,000 members. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.