Five strongest stocks of the past year:
Should you invest in them today?

As all the advertisements for investment firms so cleverly remind us, past performance is no guarantee of future results. Still, it can be tough to resist the temptation to jump on the bandwagon of the stocks that have been rising the fastest. So the question is: Is it too late to cash in on the past year's big winners?

Of the five companies which have boosted their stock market capitalizations (price per share times number of shares outstanding) the most since last year, Apple (AAPL) looks like the best bet. While momentum might propel these five higher, none of them are cheap, so I'd look elsewhere for bargains.

Since September 2008, the five companies which have gained the most market value are:

  • Ford Motor (F): +110 percent
  • Schering Plough (SGP): +59 percent
  • Goldman Sachs Group (GS): +70 percent
  • Wells Fargo (WFC): +27 percent
  • Apple: +25 percent

What these companies share -- with the exception of Wells Fargo -- is that they have managed to survive the financial crisis without government help. Some might argue that Goldman Sachs could not have made it without its TARP money, but I would suggest that Goldman was forced to accept TARP funds for the good of the industry. And it repaid that money as fast as it could.

That leaves open the question of whether you should invest in these companies now. To decide that, consider whether their Price/Earnings (PE) ratios are below their forecast earnings growth rates. If so, those companies' stocks may have further to rise. Of course, nobody really knows what moves stocks up or down -- except those big institutions that buy and sell huge blocks of stock -- so take this with a grain of salt.

Based on my analysis of the PE to earnings growth (PEG) ratio of these companies, you might consider investing in Apple -- it's the least overvalued of the bunch. Before getting into the analysis of these five companies, we should probably take Schering Plough off the list because it agreed in March to be acquired by Merck (MRK) for $41 billion in cash and stock.

And it's hard to do a meaningful analysis of earnings growth for Ford because it's expected to lose $1.33 per share in 2009 while making a 12 cents a share profit in 2010. That sounds positive, but I can't calculate the percent gain in earnings for the PEG ratio.

This leaves us with three profitable companies to evaluate:

  • Goldman Sachs is fully priced, to be polite -- at least if its forecast earnings growth of one percent is to be believed. At a PE of 41 and earnings forecast to grow a by mere one percent to $16.51 a share in 2010, Goldman's PEG of 41 makes it far from cheap (a PEG less than one is attractively priced). If you buy the stock, you're betting that it will earn much more than the forecast.
  • Wells Fargo is similarly overpriced if the earnings estimates for 2010 are right. That's because analysts expect it to earn two percent less in 2010 than the $1.70 it will make this year.
  • Apple is less over-valued than those two banks. But it's still not cheap. At a PEG of 1.9 -- a PE of 32 on earnings growth on 16.7 percent to $6.81 in 2010 -- Apple is an expensive stock. But of these three, it looks like the least overpriced.

If stocks moved solely on the basis of PEG ratios, now would probably not be a good time to look at buying these stocks. But then again, who really knows why stocks move up or down?

Peter Cohan is amanagement consultant, Babson professor and author of eight books, includingYou Can't Order Change. Follow him on Twitter. He owns Wells Fargo shares, but has no financial interest in the other securities mentioned.

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