Get Ready for the Fall

"The bigger they are, the harder they fall." This old saying sums up the worst nightmare of every homeowner, every gold buyer, and every investor in today's market. Dare ye buy at the top?

Every day, Nasdaq.com publishes "NASDAQ 52 Week High," a list of the market's top stocks -- the companies whose shares have just hit their highest intraday price of any time in the past 52 weeks. Every day, investors read this list and tremble -- some with greed (big mo', baby!), and others in pure, unmitigated, acrophobic terror (whatever you do, don't look down).

Everybody loves a winner
Over on Motley Fool CAPS, thousands of investors just like you are watching these same companies and voting their gut on whether they'll keep rising or whether they'll stumble and fall. Usually, the ratings wax optimistic as stocks hit new highs -- because everyone loves a winner. But what do you make of it when some of the smartest investors out there pan a hot stock?

You could heed them. You could ignore them. You could take the stock tickers and construct anagrams from 'em. For my money, though, the best course of action is to use the 52-week highs list as a starting point for further research. After all, stocks go up for many reasons, and it's up to you to decide how worthy those reasons are. But thanks to Motley Fool CAPS, you don't have to make the decision alone.

With that said, let's meet today's list of contenders, drawn from the latest "52 Week High" list at Nasdaq.com. What does our panel of more than 60,000 (and counting) stock gurus have to say about them?

When stocks soar on the wings of success, bears become rare. So it's no surprise that investors give average or better marks to every single stock on today's list -- every single stock, that is, but one. While many investors praise Elizabeth Arden for her 74% rise in price over the last 52 weeks, CAPS players think this company's beauty is skin deep. Let's find out why they believe Arden's attractiveness is made up. Let's examine ...

The bear case against Elizabeth Arden
Actually, of the seven players who've submitted "pitches" on Arden, only one thinks it's a hag -- but that one is an All Star, and its words deserve extra weight. Professional stockpicker NetscribeConsGds begins with a rundown of the business:

Elizabeth Arden ... is an [sic] US based beauty products company engaged in the manufacturing and marketing of fragrances, skin care products and cosmetic products worldwide. In addition to over 100 owned and licensed prestige brands, the company also distributes over 200 additional prestige fragrance brands principally to mass retailers in the United States. Fragrances contribute around 75% of the sales followed by skincare and cosmetics.

So far, so good. What's wrong with that? Netscribe continues:

"The life cycle of fragrances has shortened dramatically in recent years. Loyalty towards the brand is declining and more and more customers are experimenting with different brands within a short span. Hence, companies are launching new products at a very faster rate to meet the market demand. To face the industry challenges, Elizabeth Arden has been incurring huge marketing spends and undergoing promotional activities, which is finally grinding down the bottom lines of the company. The company did generate about 12% rise in revenues in the first quarter of fiscal 2007 driven by sale of new brands and acquisitions of Riviera and Sovereign. However, revenues are rising at the cost of spiraling expenses. In the past two quarters, the company financials has [sic] gone in the red and costs are likely to rise ahead on account of marketing expenses and acquisition related integration costs."

My review of Arden's recent filings confirms that there is reason for concern. In fiscal 2007, the company grew its sales 18%, but cost of goods sold increased 21%, and sales, general, and administrative expenses rose 19%. The differences are slim; but they do suggest margin compression due to rising costs.

It's the balance sheet that really worries me. There, we saw accounts receivable modestly outpace sales last year, and unsold inventories skyrocketed -- up 41% year over year. We'll need to see the firm's 10-K filing before coming to any firm conclusions, of course. It could well be that much of the inventory increase came from Arden stockpiling raw materials to meet anticipated demand (a situation known as "positive inventory divergence"). But for now, the signs are sufficiently worrisome that I'd advise caution on this stock.

That said, Fools of a feather don't always fly together. For a contrary view of Arden's success, don't miss Lawrence Rothman's fashionable column: "Elizabeth Arden: Black Is the New Red."

Time to chime in
So what do you think? Is Lawrence right? Am I wrong to worry about that towering pile of perfume in Arden's warehouse corner? Don't be shy -- come on over to CAPS and tell us what you think.

Fool contributor Rich Smith does not own shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 248 out of nearly 35,000 rated players. China Mobile is a Motley Fool Global Gains recommendation. NVIDIA, Biogen Idec, and Priceline are Motley Fool Stock Advisor selections. The Fool has a natural-looking disclosure policy.