Invest in the trend, not in the hype

@lamonicabuzz March 1, 2012: 5:19 AM ET

(MONEY Magazine) -- Last year was a rough one for many of Wall Street's recent darlings. Netflix, Salesforce.com, and Travelzoo are just a few of the "it" stocks that tumbled in 2011.

What do they have in common? They were bid up at some point by analysts and traders who said you could all but ignore the risks surrounding these stocks -- like their absurd valuations -- because the stories behind their growth were so compelling. Wrong!

Before Netflix (NFLX) alienated subscribers and investors last year by hiking prices and issuing a massive earnings warning, its shares traded at a price/earnings ratio of about 80, based on forecasted earnings. Nobody's that good, including Netflix, whose shares plunged 60% in 2011.

This doesn't mean you have to ignore the stories driving the market. You can play the trends, but do it through more established names, many of which pay dividends.

Top picks from top pros

"It's time to start behaving like an investor and stop worrying like a trader," says Hank Smith, head of equities at the asset manager Haverford. Here's how:

Streaming video

If you think streaming video is in its infancy, why buy Netflix when you can invest in Walt Disney (DIS, Fortune 500)? Netflix, even after its fall, trades at nearly 30 times 2013 profit forecasts. (It is expected to post a small loss in 2012.) By contrast, Disney's P/E is just 13, based on estimated fiscal 2012 earnings. The stock also yields 1.5%, near what 10-year Treasuries pay.

Disney benefits from many of the same factors that attracted people to Netflix. The media giant owns a stake in Netflix rival Hulu. It is also a big supplier of movie and TV content to digital video services like iTunes. And the House of Mouse is growing faster than you'd expect.

Cloud computing

Salesforce.com (CRM) has become synonymous with cloud computing, which lets you store digital files online. But at a P/E of 72, the stock appears overvalued. IBM (IBM, Fortune 500) and Microsoft (MSFT, Fortune 500) are also big players in the cloud, yet they have P/Es below the teens and growth rates of around 10% a year.

Online travel

Deal site Travelzoo (TZOO) isn't as frothy as it used to be. But even at 18 times 2012 earnings, it's less attractive than Expedia (EXPE). The world's biggest online-travel site trades at a P/E of around 10, with profits growing more than 10% a year.

Don Yacktman, manager of the Yacktman Funds, notes that "higher-quality blue-chip companies are cheap." Not only that, these boring old bets can be a surprisingly decent way to play promising new trends.

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