Kaboom! Suddenly, a stock starts taking off like crazy. Sometimes, it's a perfectly reasonable catalyst like a big dividend payout or positive earnings after a tough recession. Other times, it's Mr. Market reminding us who's in control - there's no rhyme or reason!
The most interesting part is that once a stock starts to get some real momentum, the side affect can be that, that momentum pushes it even higher. Most would probably put this down to speculation but sometimes, it's not.
We dug through lists of stocks that recently hit their 52-week highs to find ones that actually deserved to be there. These are stocks that are rocketships but have the fundamentals backing them up. From a valuation perspective, some have the potential to go higher. Some are fairly valued where they are.
More specifically, for each of these stocks, we'll let you know analyst ratings, how they measure up from a fundamental perspective, and whether they're undervalued according to a discounted cash flow valuation using a 15% discount rate.
Without further ado, here are stocks5 that have hit their 52-week high and might have the steam to reach even greater heights!
1. CVS Corporation (CVS)
CVS is a pharmacy services company in the U.S. They are currently trading at $45.78 with a market cap of $58B. They started the past 12 months at $37.43 and in that time, the share price has increased 23% to hit its current 52-week high. Wall Street analysts have put an average target price of $51.28, suggesting a further upside of 12%. Vuru's Growth Price is almost in agreement with Wall St.; pegging a fair value of $49.70 on CVS, suggesting it's undervalued by 8.5%. This is based on annual free cash flow growth of 0%. Adjust the assumptions here if you think we should be being more aggressive.
While margins are tight in retail businesses, CVS has been extremely consistent with net profit margins staying in the 2-3% range over the past 10 years. They've also managed to get their capital intensity under control in that same time period. From just looking at the numbers, it seems the business has been extremely well-managed over the past 5 years.
2. Davita Inc. (DVA)
DVA provides dialysis services for patients suffering from chronic kidney failure. Their current price is $92.59 and they are an $8.7 billion dollar company. 12 months ago, they were priced at $85.02 and in that time, the share price has increased 10% to hit its current 52-week high. Wall Street thinks this has room to run, albeit minimal room. They've put an average target price of $95.49, suggesting a larger than life upside of 3%. Vuru's Growth Price is not as bullish, suggesting the stock is fairly valued at $91.50. This is based on annual free cash flow growth of 6.4% over the next ten years. As a comparison point, recent growth in free cash flow has been phenomenal (40-60%). It's unclear how sustainable that is given their past history. You can adjust the assumptions here if you see there being more sustainability in this growth and you might based on the next tidbit about this company.
What's interesting here is that Berkshire Hathaway (Warren Buffett) invested over $270 million in the first quarter, on top of over $220 million he'd invested the quarter prior. From looking at the timing of those investments, he probably got in around the $65-80 a share, mark.
3. ASML Holdings (ASML)
ASML designs, manufactures, markets and services semiconductor processing equipment used in the fabrication of integrated circuits. Currently trading at $51.04, ASML has a market cap of $21B. In the past 12 months, this stock has had quite a run (42%) from $35.30 to its current price. It looks like the catalyst was revenue guidance it issued in April 2011. Wall Street analysts, on average, put the fair value of ASML at $52.02, $1 above where its trading right now. Vuru's Growth Price is a slightly more conservative, in fact $0.12 more conservative. It's pegged a target price at $51.90. This company's growth has been extremely inconsistent over the years and as a result, seems like it has an unpredictable business. It's a little too exciting for our liking!
On the positive side, this company does look like it's become the market leader in this space, outperforming both Canon and Nikon. This may explain the unpredictability of this business, as they may have spent significantly to attain that market leadership position.
4. Mckesson Corporation (MCK)
MCK offers medicines, pharmaceutical supplies, and information and care management products and services for the healthcare industry. The current price is $92.05 with a market cap of $21B. 12 months ago, MCK was at $83 and has run up 10% since then. It's not a huge run, but it might just be the beginning. Wall Street analysts see a potential upside of 11%, with an average target price of $102.27. Vuru puts the fair value much higher at $143. This suggests MCK is undervalued by 55.61%. This is based on 12% annual free cash flow growth going forward.
The best thing about this stock is that its had 10 years of consistently positive free cash flow. That means through thick and thin (dot-com bust and the recent financial crisis), this stock has been able to generate positive results for shareholders. Color me impressed, especially given the razor thin margins the company operates with.
5. Raytheon Company (RTN)
RTN provides electronics, mission systems integration and other capabilities in the area of sensing, effects and command, control, communications and intelligence systems, as well as mission support services in the U.S. and internationally. This stock's trading at $54.53 with a market cap of $18B. 12 months ago, it was at $48.21, so it's only moved up minimally. This may be because people are paying attention to the fundamentals on this stock. Wall Street puts the fair value at $56.38, suggesting an upside of 5%. Vuru is of a similar mind with a Growth Price of $56.92. However, these are both based on around 0.1% annual growth. It's up to you to judge whether this is a fair assessment of RTN's potential.
It may not be because of the growing demand for unmanned aerial vehicles (UAV) from the U.S. They see this as a great strategy to fight against the guerilla groups in the Middle East. RTN has unparalleled expertise in the sensor technology that's required for UAVs and this might put them in a great position for high growth.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.