5 stocks hitting new heights
Could DreamWorks continue upward for the next 5 years?
This post comes from The Motley Fool's Rich Smith.
The idea of buying a stock right after its 52-week high sends dread through investors who worry about the "gravity" thing.
That's the thesis of my weekly column on Nasdaq ($COMP) stocks trading around their one-year highs. I run the names through the "wisdom of crowds" meter we call MSN CAPS, and out comes a list of stocks that could be poised to plunge.
And while many of the stocks will indeed fall back to Earth, some seem immune to gravity, riding a megatrend to ever-greater heights.
Let's move beyond stocks hitting 52-week highs to identify those trading at heights not attained in the past five years. Our candidates come from the most recent MSN Money list of stocks trading at five-year highs. What we want to know is which of these will thrash the market averages for another half-decade.
Here are this week's leading contenders:
DreamWorks Animation (DWA) is a producer of computer-animated feature films. The stock hit an all-time high of $43.51 on March 1. The Glendale, Calif., company has a four-star rating at CAPS.
Dr Pepper Snapple (DPS) is North America's third-largest marketer of soft drinks. Shares in Plano, Texas, company hit a record high of $32.18 on March 1. The stock rates three stars.
TJX (TJX) operates the nation's two largest off-price clothing chains, Marshalls and TJ Maxx, as well as six other retail chains. Its European retail arm has about 230 stores in the United Kingdom, Ireland and Germany. Shares in the Framingham, Mass., company hit an all-time high of $42.09 on Feb. 26. The stock has a two-star rating.
Estee Lauder (EL) makes and sells skin care, makeup and fragrance products in about 140 countries. Shares in the New York company hit a high of $62.23 on March 1. The stock has a one-star rating.
CIT Group (CIT) is a holding company for a bank that provides financing and management advisory services to small and midsized companies worldwide. Shares in the New York company hit a high of $37.75 on March 1. The stock has a one-star rating.
Hot stocks leave investors cold
Is the recession over? Warren Buffett says it is. And with the Dow Jones Industrial Average ($INDU) still sitting comfortably above the 10,000-point level, you'd think investors would agree. But judging from the miserly ratings accorded to some of the stocks listed above, it appears many CAPS participants doubt Estee Lauder, CIT Group and TJX are worth as much as their stock prices suggest.
Not all are skeptical. Despite reporting weak revenue in the fourth quarter, Dr Pepper Snapple remains in favor, thanks to a windfall estimated at $1 billion that the company is due to receive from Coca-Cola (KO), which must negotiate a new distribution agreement in the wake of Coke's plan to acquire its biggest bottler.
Dr Pepper Snapple licenses some of its brands to Coca-Cola and PepsiCo (PEP), which also turned over a pile of cash to Dr Pepper after it bought out some of its bottler operations.
And CAPS participants are feeling positive about DreamWorks Animation, the company spun off from Steven Spielberg's privately held DreamWorks Studios in 2004 in a public stock offering.
A bullish case for DreamWorks
In evaluating the company, CAPS member "cadunce" focuses on the basics: "All you have to do is look at their slate of films coming out this year to see this is going to be an excellent year for 'Big D.'" (Scheduled for release in 2010 are "Shrek Forever After," featuring the voices of Mike Myers, Megan Fox, Justin Timberlake and others, the superhero spoof "MasterMind" and "How to Train Your Dragon," the studio's second offering in digital 3-D.)
"Papa26" agrees with cadunce about DreamWorks' 2010 lineup and says ancillary income from the toys and such will be "substantial."
Plus, as "FinerPoints" points out, DreamWorks could be a takeover candidate from a larger studio, possibly Warner Brothers Entertainment, part of Time Warner (TWX), which the CAPS member thinks might feel pressured to act by the recent acquisition of Marvel Entertainment by Walt Disney (DIS).
"(DreamWorks) in the meantime is successful and solid, so even if no one comes to the consummation table, the company will continue to grow and compete well," FinerPoints wrote.
Dream or nightmare?
So heads, DreamWorks gets acquired at a premium, or tails, no one buys it, DreamWorks keeps churning out hits, and we profit anyway. Is this analysis too good to be true?
I realize I'm tempting fate (and DreamWorks shareholders, and movie critics) when I say this, but, yes, this rosy scenario is too good to be true.
- Video: Betting on the box office
Fact is, DreamWorks owners had best cross their fingers and hope for a buyout, because as things stand now, with DreamWorks operating on its own, the stock simply is not worth what investors are paying for it.
I say this not just because the price-to-earnings ratio seems frightfully high for this company (24 times earnings, versus 17% projected long-term growth). I say this because the closer you examine DreamWorks' valuation, the worse it appears.
Take the P/E, for example: It's based on the $151 million DreamWorks earned last year, right? Problem is, DreamWorks isn't always that profitable, and has averaged earnings 17% below that level over the past five years.
Or consider the more forgiving metric of free cash flow. DreamWorks generated just under $100 million in free cash last year but has averaged closer to $174 million per year over the last five years.
That's enough to push the valuation down to 22 times average free-cash-flow production -- which, to my mind, is still too much to pay for the 17% growth analysts are expecting -- and way too much to pay for a company with the unstable revenue streams characteristic of a movie studio.
A big green ogre
I realize that within the fetid swamp of overpriced equities that is the film industry, DreamWorks smells slightly less stinky than the moderately overpriced Disney, or the up-and-down but usually profitless wonder that is Lions Gate Entertainment (LGF). But relative valuation alone isn't enough to make DreamWorks bloom like a rose -- or smell as sweet.
- On Bing: History of 3-D movies
Fact is, if you're looking for a bargain in filmmaking, I believe you're far better off taking a gander at someone like Time Warner, whose 17 P/E, 13% growth rate and 3% dividend yield seem positively attractive by comparison.
As for chasing DreamWorks higher in hopes of cashing in on a buyout? Sorry. I like the "Shrek" movies, folks, but I'd rather kiss a frog than sink money into the company.
Disagree? Feel free. Click over to the company's CAPS page and tell me why I'm wrong.
More from The Motley Fool:
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.
These hot movers could rise by double digits in coming months.
VIDEO ON MSN MONEY
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.