5 rocket stocks ripe for a fall?

Collective wisdom suggests that highflying UnitedHealth will remain aloft.

By Caps Editor Mar 10, 2010 1:43PM

This post comes from The Motley Fool's Rich Smith.

 

It's the nightmare of every investor: buying a rocket stock just before it takes a nose dive.

 

While stocks often rise for a reason, sometimes the rise becomes the reason. Despite being cautioned against it, investors often buy hot stocks, trusting momentum to keep 'em moving higher.

 

Problem is, if the price goes up too much, even a great company can be a lousy investment.

Below I list a few stocks that have soared over the past year but might be ripe to fall back to Earth.

 

UnitedHealth Group (UNH) provides health insurance to some 70 million customers. The Democrats' inability to pass President Barack Obama's health care reforms has been good for managed-care companies such as UnitedHealth. Shares in the Minnetonka, Minn., company are up 87% over the past 52 weeks.

 

US Bancorp (USB) has more than 2,900 locations and 5,000 branded ATMs in two dozen states. Investors think that the Minneapolis company is emerging from the financial crisis in relatively sound shape: The stock has risen 143% over the past 52 weeks.

 

Nvidia (NVDA) makes chips used in computer graphics. Shares in the Silicon Valley company are up 112% over the past year, reflecting the explosion of online video and the continued rollout of multimedia devices like the iPad from Apple (AAPL). 

 

Halliburton (HAL) is the world's second-biggest provider of oil-field services. Investors who see the Houston company as well-positioned to compete in the hottest growth areas -- deep-water and U.S. shale gas -- have pushed up shares by 97% over the past year.

 

General Electric (GE) is a conglomerate with operations in multiple sectors, including energy, medical devices, media and financial services. Shares in the Fairfield, Conn., company are up 122% over the past 52 weeks on investor optimism about a global recovery.

 

If you ask the 150,000-plus investors on MSN CAPS, these stocks aren't finished rising. Four of the companies have four-star ratings, and one –- UnitedHealth -- has a five-star rating, the highest available at CAPS.

 

The bullish case for UnitedHealth

CAPS member "reemiep" is enthusiastic about the prospects for UnitedHealth even if Democrats manage to overhaul the nation's health insurance industry.

 

"Health care reform will not have a negative impact (on UnitedHealth)," reemiep wrote. "It will . . . result in a significant increase in membership, higher revenues and steady or increased profit performance."

 

CAPS All-Star "Jeffreyw" predicted that "no matter what legislation results, these guys will be providers, and find ways to do it profitably, becoming the Wal-Mart (WMT) of health care. . . . Not sure that's good for patients, but it is for investors!"

 

And CAPS participant "vballsmith" said that even in the "worst-case scenario," the proposed health care overhaul would do less harm to managed-care companies than opponents fear. "Nothing's going to happen until at least 2013 and (UnitedHealth) has 3 years of profits to earn." Vballsmith added: "I would own this stock purely on valuation."

 

It's easy to see where vballsmith is coming from. UnitedHealth sells for a price-to-earnings ratio of only 10.3. That's not as cheap as WellPoint (WLP), which trades at a P/E ratio of 6.2. Then again, UnitedHealth isn't suffering from the  same level of bad press that WellPoint has endured. More importantly, 9.9 times forward earnings is not an unreasonable price to pay for UnitedHealth, relative to the consensus forecast for 8.5% annualized growth over the next five years.

From there, the picture only gets brighter. Free cash flow for the past 12 months comes to $4.9 billion. That's roughly 30% higher than UnitedHealth reports as its net income, and it's enough to give this stock a very cheap-sounding valuation: just eight times free cash flow.

 

Is that cheap enough to justify sailing the choppy waters of health care reform? I think it is, but that's not the point. The point here is what you think about UnitedHealth. Will it survive Obamacare? Click over to the company's CAPS page and share your thoughts.

 

More from The Motley Fool:

 

3 more outrageously cheap stocks

 

Don't touch these 3 huge value traps

 

Political theater: More entertaining than helpful
Tags: CAPS
2Comments
Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

113
113 rated 1
268
268 rated 2
422
422 rated 3
632
632 rated 4
512
512 rated 5
518
518 rated 6
682
682 rated 7
523
523 rated 8
343
343 rated 9
124
124 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
KOGKODIAK OIL & GAS Corp10
COPCONOCOPHILLIPS9
TAT&T Inc9
DVNDEVON ENERGY CORPORATION9
EOGEOG RESOURCES Inc9
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.