5 rocket stocks ripe for a fall?
Collective wisdom suggests that highflying UnitedHealth will remain aloft.
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.
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These companies won't soar like other plays in the sector, but they make for great income sources.
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