5 stocks scaling the heights

Collective wisdom can give an early warning on stocks with momentum that might be sustained. One candidate: Oracle.

By Caps Editor Jan 21, 2010 12:52PM

Bull Market © First Light/Image StateThis post comes from The Motley Fool's Rich Smith.

 

The idea of buying a stock right after it establishes a 52-week high sends dread through many investors, who start to worry about the whole "gravity" thing.

 

That's the thesis of my weekly column on Nasdaq Composite Index ($COMPX) 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.

But while many will indeed fall back to Earth, some seem immune to gravity, steadily riding a megatrend to ever-greater heights.

 

Today we'll move beyond stocks hitting 52-week highs to identify companies surpassing five solid years of outperformance. Each recently appeared on an MSN Money list of stocks trading at new five-year highs. What we want to know is which ones will thrash the market averages for another half-decade.

 

Here are this week's leading contenders:

 

Oracle (ORCL) is a leading provider of business software. The stock hit a nine-year high of $25.64 on Jan. 15. At CAPS, Oracle has a four-star rating.

 

Open Text (OTEX) provides software that helps organizations manage information and work flow. The stock hit an all-time high of $42.61 on Jan. 15. Open Text has a two-star rating at CAPS.

 

RehabCare Group (RHB) offers inpatient and outpatient rehab units for its customers, which include hospitals and nursing homes. The stock hit an eight-year high of $34.88 on Jan. 19. At CAPS, the stock has a two-star rating.

 

Baidu.com (BIDU) operates the largest Chinese-language Internet search engine. The Beijing company's American depositary receipts hit a record high of $470.25 on Jan. 15. Baidu rates two stars at CAPS.

 

Scripps Networks Interactive (SNI) operates five cable networks, including the Food Network and Home and Garden Television. The stock hit its all-time high of $46.94 on Jan. 15. The stock has a one-star rating at CAPS.

 

Which of the five has the best chance of making you the most money this year? The votes from the CAPS community are in, and the verdict is clear: Oracle.

CAPS member "SH3" calls Oracle "the king of large-scale databases with an ever-growing array of middleware. The primary moat is product quality," SH3 says, "but the range of middleware is helping (the company) develop a 'top to bottom' answer to information management questions."

 

Regarding Oracle's bid to acquire Sun Microsystems (JAVA), SH3 argues that Oracle CEO Larry Ellison's "commitment to keeping the hardware is obvious. . . . (He is) taking a page from Apple's (AAPL) book, offering a complete system, where (thanks to Linux) it effectively controls the entire user experience."

 

CAPS member "pranjan" also thinks acquiring Sun would allow Oracle to "benefit from an integrated hardware-software stack. . . . This should translate to higher service revenues on larger deals. Oracle is good at monetizing its products."

 

Last but not least, in a bow to above-par trash talking, I just cannot resist quoting CAPS member "Afthought": "Best of breed generally outperforms a pack of mixed breeds and mongrels." Note to IBM (IBM) and Microsoft (MSFT): I think he's talking to you. (Microsoft owns and publishes MSN Money.)

Afthought may be of the opinion that Oracle's rivals are dogs with fleas, but an objective look at the three companies suggests they're all pretty much equal from a valuation point of view. Whether it's a question of buying Oracle at 22 times earnings and 12% projected growth annually over the next five years, Microsoft at a 20 P/E ratio and an 11% growth rate, or IBM at 13.5 and 9% -- none of these three stocks exactly screams "Bargain!" to me.

 

But why might Oracle not be overpriced? For one thing, if you dig a little deeper, you'll notice that while Oracle reported only $5.8 billion as its GAAP earnings over the past four quarters, its free cash flow is actually quite a bit higher -- $8.4 billion. With so much more cash flowing into its bank account than it reports as "net income," I think Oracle looks reasonably priced at 15 times free cash flow.

 

Now, would I like to see the margin of safety get a little wider before I buy into Oracle? Absolutely. I'm not a fan of buying stocks that look only "reasonably priced" -- deep discounts are more my cup of tea. But, as Afthought says, this stock is best of breed. Considering that, getting a discount might be too much to ask.

 

Do you have an opinion on Oracle? Click over to the company's CAPS page and tell us about it.

 

Related articles from The Motley Fool:

 

What a real growth opportunity looks like

 

Is value investing dead?

 

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