5 Stocks I'd Willingly Pay a Premium For


Yesterday, I broke out my handy-dandy valuation metric known as TMFULOI and, utilizing the Motley Fool CAPS Screener as well as data from Morningstar and Yahoo! Finance, concluded which five companies out of a pool of nearly 5,000 are the most overvalued in the market.

Today, I'm not using any specific calculations or screeners. Instead, I want to share five companies that boast significant valuation premiums relative to the S&P 500 that I'd gladly pay a premium for. Traditionally, I love deep-value investments, but I consider the tangible and intangible aspects of these five companies more than worthwhile enough to support their lofty valuations.

Intuitive Surgical
What makes Intuitive Surgical so dominant is the simple fact that there are no other profitable soft-tissue robotic surgery competitors. Period! Until the time comes when there are, its da Vinci surgical systems will continue to command top dollar. In addition, Intuitive has such a gigantic head start when it comes to training physicians on how to use its robotic surgical equipment that I project it'll see double-digit procedure growth through the remainder of the decade, even if one of its competitors gets its act together.

Two months ago, noted short-selling specialist Citron Research listed five bullet points explaining why Intuitive's premium may not be justified, but Intuitive's latest earnings report rapidly cast doubt on Citron's thesis. With a 15th consecutive earnings beat under its belt and management projecting procedure growth of 20% to 23%, I would gladly pay 10.5 sales and 32 times 2013's profit estimates for Intuitive Surgical.

Lumber Liquidators
There's a very good reason that Lumber Liquidators' CEO, Robert Lynch, was voted the "CEO of the Year" by the Motley Fool community in 2012: He's been proactive, not reactive, with his advertising and product line.

Since becoming CEO on Jan. 1, 2012, Lynch has expanded the company's advertising campaign to target even those individuals looking to hire a professional to install their flooring instead of just traditionally targeting do-it-yourself homeowners. Lynch's other strategies, which include streamlining its product development and logistics, as well as focusing on the value of its flooring offerings, have resulted in double-digit same-store sales increases. Lumber Liquidators, which is set to report today (Feb. 20), stands to benefit from homeowners looking to remodel their own homes, from new home construction, and from record-low interest rates, which are spurring home improvements. Lumber Liquidators isn't cheap at nearly eight times book value and 31 times forward earnings, but it's a small price to pay for a truly fantastic management team.

Palo Alto Networks
With recent cyber-attacks on government websites coming to light, the need for higher-quality cybersecurity software is no longer optional -- it's mandatory. An executive order signed by President Obama last week to set cybersecurity standards in the U.S. could mean even faster growth for Palo Alto Networks. Unlike traditional security companies such as Cisco Systems and Juniper Networks, which build their security software directly into their hardware, Palo Alto's software is geared toward the cloud with nearly all upgrades being accomplished on Palo Alto's end. This means ease of use for its customers and plenty of recurring revenue for Palo Alto.

In its first-quarter results, reported in December, Palo Alto reported sales growth of 50% and also announced the launch of a new next-generation firewall platform in collaboration with VMware, a virtualization company that's also caught my attention recently. With $342 million in cash, a phenomenal growth rate, and disruptive technology, even a forward P/E of 128 couldn't keep me from suggesting a deeper dive into Palo Alto Networks.

You'd have a hard time finding anyone who'd make a case for Amazon as a value play -- but I'm just one of those rarities, I guess! My favorite aspect with Amazon is that you get a blend of multiple businesses all under one roof. You get a class leader in consumer retailing, with its Internet-capable Kindle Fire e-reader leaving Barnes & Noble in the dust. You get one of the most revolutionary cloud-service providers, with its EC2 virtual data center and S3 storage farm being the models other cloud providers often emulate. And finally, you get a company able to rival Netflix in content streaming. Amazon has the cash on hand to deal with rising content costs, and it's been expanding its streaming influence overseas.

Amazon's three consecutive quarterly EPS misses might scare off most investors, but I can see the light at the end of Amazon's high-cost expansionary measures. With the company at 74 times forward earnings and with better than $7 billion in net cash, I continue to throw my support behind Amazon.

Dunkin' Brands
Paying 25 times this year's earnings might be considered a bargain for some of the aforementioned companies, but for Dunkin' Brands, which is only expected to grow sales by 8% this year, it could be construed as a steep price to pay. I, however, see Dunkin' in a completely different light.

Dunkin' is capitalizing on all the key trends that are driving traffic into restaurants and coffeehouses. First, it's offering its very own signature coffee blend, which creates an army of regular customers. It's also been offering an expanded coffee selection in its stores, partnering with Green Mountain Coffee Roasters to deliver self-labeled single-serve K-Cups to its customers. Finally, Dunkin', while still sticking with its traditional doughnut business, has tweaked its menu options to include healthier food items that appeal to a broader audience.

The amazing aspect of the coffee market is that while we imagine a rigid box filled with dollars devoted to coffee spending, the market for coffee products is increasing rapidly, even domestically, allowing for coffeehouses like Starbucks and Dunkin' Brands to expand voraciously without stepping on each other's toes. My suggestion is to "Keep on Dunkin'," folks!

Foolish roundup
Now that I've shared five pricey companies I'd pay a premium for, perhaps you'll share a company others have deemed as overvalued in the comments section below.

Are stories of this demise greatly exaggerated?
Recently, some investors have questioned Intuitive Surgical's future. However, Intuitive Surgical expert Karl Thiel believes a visible path to long-term growth persists. Will Intuitive capitalize, or be crushed by unforeseen pitfalls? His report highlights all of the key opportunities and risks facing the company -- and includes a full year of ongoing updates as key new hits -- so be sure to claim your copy by clicking here now.

The article 5 Stocks I'd Willingly Pay a Premium For originally appeared on Fool.com.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool owns shares of Cisco Systems, VMware, Amazon.com, Netflix, and Starbucks. Motley Fool newsletter services have recommended buying shares of Intuitive Surgical, Lumber Liquidators, Cisco Systems, VMware, Amazon.com, Netflix, Green Mountain Coffee Roasters, and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Originally published