Scary stuff, this investing. Credit markets could send the stock market careening. Housing stocks blow apart like a trailer in a tornado's path. And one of the top-performing industries of the past year that, pundits say, is set to unravel like a retread peeling off on Route 66. What's an investor to do?

While it's been tough to bet against Goodyear Tire (NYSE:GT), it's been just as scary to invest with it. After teetering on the brink of bankruptcy, the tire maker seemed to get its financial house in order and picked up traction on its turnaround plan. The stock responded in kind, rising from around $4 at its bottom in 2003 to more than $36 at its top, an 800% reversal of fortune that can leave you giddy if you were in for the ride.

Investors have been spooked by Goodyear's returns all the way up, though. In May of last year, I wrote that tire makers looked like they were ready to roll, and pointed to Goodyear's particular position, but I was thinking most of the industry stood out like whitewalls on a '57 Cadillac.

Before the industry took a breather toward the end of this summer, it was indeed turbocharged and was the best-performing industry. Cooper Tire & Rubber (NYSE:CTB) was along for the ride, roughly doubling in value in the past year. The industry's growth was spurred at least in part by companies being able to pass along raw material price increases to consumers.

Yet that growth has flattened over the past few months, and there are a few conditions that might slow Goodyear even further.

Petroleum is a material ingredient in 60% of the products used to make tires, and, as of late 2005, a $1 per gallon boost in the price of oil costs Goodyear $20 million. Over the past year, crude oil prices have risen 67%, from $55 a barrel to more than $90 a barrel now. There's a limit to what Goodyear and the other tire makers can pass along to consumers. Other raw material prices may be improving, but with oil as the dominant component of tires, profit margins will suffer.

The industry is also facing increased competition from Asian tire makers. While Goodyear has manufacturing operations at more than 90 facilities in 28 countries, tires made in world markets are intended for those markets, even those from its plant in China. So it cannot expect to realize any cost savings here from tires made overseas. With higher labor costs from its unionized workforce, Goodyear might suffer market-share losses to lower-cost competitors.

While it did get the health-benefit obligations off its balance sheet with the creation of a union-run health-care trust fund -- a strategy General Motors (NYSE:GM) and Chrysler have emulated (presumably Ford (NYSE:F) will as well) -- the tire maker still has a mountain of debt it needs to work off.

In its last quarterly report for the period ended June 30, Goodyear had more than $5 billion in debt and capital lease obligations. Sure, that's better than the $6.5 billion that was weighing it down the year before, but almost $3.6 billion of that will be coming due within the next few years unless it can renegotiate terms, something it has been working on.

In addition to these structural scarecrows, fellow Foolish colleague Selena Maranjian noted these scary facts about Goodyear recently:

  • Five-year average annual sales growth: 7.4%, vs. 13.9% for the S&P 500.
  • Dividends: Eliminated in 2003 to cut costs.
  • Return on assets: A skimpy 2.7% from 2001 through 2006.
  • Net profit margins: A negative 2.8% average over the same period.

The top U.S. tire maker also has valuation issues that might creep out an investor. While it trades at an enterprise value-EBITDA premium to its rivals, its EBITDA margin is only about half that or less than that of Continental and Bridgestone.

I've owned Goodyear's stock for several years now and have enjoyed significant price appreciation. Although it's currently discounted about 25% from its 52-week high, at these levels, Goodyear is offers limited upside and some scary downdraft potential. An investment here might be a toxic brew.

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