Have these 5 hot stocks topped out?

Collective wisdom can sound an early warning on stocks poised for a pullback. Is Corning one candidate?

By Caps Editor Dec 9, 2009 2:28PM

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


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


Every day, Web sites list companies whose shares have hit new 52-week highs. And every day, investors read the list and tremble -- some with greed, others with terror.


In our MSN CAPS investing community, these top stocks usually enjoy favorable ratings, since everyone loves a winner. But what should you do when some of the community's smartest investors pan one of these hot stocks?


For starters, consider using the 52-week-high list as a starting point for research. Stocks rise for many reasons, but a little help from CAPS can make it easier to assess the worthiness of those reasons.


Let's see what some of the 140,000 stock gurus in CAPS have to say about some stocks that recently hit one-year highs:

  • Corning (GLW) has an impressive record of commercializing cutting-edge technologies, from oven-proof Pyrex dishes to the thin strands of optical fiber that replaced copper as the backbone of the nation's telephone network and allowed for the Internet's explosive growth. At CAPS, the Corning, N.Y., company has a five-star rating.
  • Intuitive Surgical (ISRG) provides a combination of software, hardware and optics that allow surgeons to perform robotically aided procedures. At CAPS, the Sunnyvale, Calif., company has a four-star rating.
  • Walt Disney (DIS) is an entertainment and media conglomerate with some of the nation's most iconic brands, from Mickey Mouse to ESPN. At CAPS, the Burbank, Calif., company has a four-star rating.
  • Texas Instruments (TXN) makes digital signal processors that make their way into millions of mobile phones and other consumer electronics. The Dallas company has four-star rating at CAPS.
  • Oracle (ORCL) makes software used to manage business data. The Redwood City, Calif., company has a four-star rating at CAPS.

Everybody loves a winner

And really, how can you not love these stocks? Oracle, TI, Disney -- these names rank among the best of the best. And these days, high-tech tickers such as Intuitive Surgical and Corning are ceding them no ground.


Corning in particular draws our attention as the sole five-star stock in a sea of none-too-shabby four-star stalwarts. But just what is it about Corning that merits that final, chart-topping star?


The bullish case for Corning

TV's the thing, according to CAPS member "Shaftsbury," who recently wrote: "In a slow economy, one of the most inexpensive and popular pastimes we have is TV watching. Flat panel(s) will eventually replace all old-technology sets."


And who makes the glass for those flat-screen LCD TVs? You guessed it: Corning.


But that's not all Corning makes. As CAPS participant "caterpillar10" informs us, Corning is also "where Pyrex (and) fiber optics . . . came from." The company touts its Clear Curve technology as a breakthrough in efforts to extend fiber-optic cable to apartments and multi-dwelling units, which house about 40% of the world's population.


Caterpillar 10 is also excited about cutting-edge technology being developed by Corning engineers that could neutralize the poisons in the hundreds of tons of mercury emitted each year by the world's coal-fired power plants.


And as CAPS All-Star "mrindependent" argues, there's seldom been a more attractive price at which to purchase a stake in this high-tech superstar: "Corning is selling for just 1.5 times book value, which is far below its historical norm," mrindependent wrote.


How much below the norm, you ask? Quite a bit, actually. Over the past 10 years, Corning has averaged a price-to-book-value ratio of 4.3 -- making today's 1.9 P/B look like quite a bargain (it's grown a bit since mrindependent spotted it).


The picture seems similar from the perspective of price to earnings. If you throw out the turnaround year of 2004, with its triple-digit P/E, it appears that a "normal" P/E for this stock over the past five years has been somewhere in the neighborhood of 26. Today the stock sells for less than 19 times earnings -- again, a bargain, albeit less so than the P/B ratio would suggest.


How to value a superstar

Skeptics may contend that even a 19 P/E ratio is too much to pay for Corning. Analysts don't expect the stock to grow its earnings at much more than 12% per year over the next five years. That disparity is enough to give a value investor a serious case of the willies (or "won't-ees").


Plus, even the earnings Corning does produce seem a bit lacking in oomph. Over the most recent five years for which we have complete financials, Corning reported earning $7.6 billion. Free cash flow, however, amounted to a mere $2.2 billion over the period.


Think big

That said, investors often treat large-cap, high-quality names like Exxon Mobil (XOM), Coca-Cola (KO) and, yes, Corning differently. These companies' moats are so deep, and their reputations are so strong, that many investors will happily "pay up for quality" -- and keep paying for years on end.


When you consider this fact in Corning's favor, alongside the stock's current discount to historical valuation, even a perma Corning bear like me must admit: There's no guarantee that the stock will get any cheaper.


So if you ask me whether Corning is primed to fall from its recent 52-week high, I'll simply say no. For whatever reason, the laws of gravity seem not to apply to Corning.


Will they ever? Tell us why, or why not, right here.


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