Get Ready for the Fall

"The bigger they are, the harder they fall." It's the worst nightmare of every investor in today's market -- buying a hot stock just before it takes a nosedive.

Every day, Nasdaq.com publishes a list of stocks whose shares have just hit new 52-week highs. And every day, investors read the list and tremble -- some with greed, others with terror. On our Motley Fool CAPS investing community, these top stocks usually enjoy favorable ratings, since everyone loves a winner. But what should you do when some of CAPS' smartest investors pan one of these hot stocks?

For starters, consider using the "52-week high" list as a starting point for further research. Stocks can rise for many reasons, but a little help from Motley Fool CAPS can make it easier to figure out how worthy those reasons are. Let's see what the more than 105,000-plus stock gurus (and counting) in CAPS have to say about the list's latest contenders:

Companies are selected from the "NASDAQ 52 Week High" list published on Nasdaq.com on the Saturday following close of trading last week. Year-ago and recent prices provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.
^ Split-adjusted.

Everybody loves a winner
When stocks soar on the wings of success, bears become rare. Nearly every one of the stocks on today's list, in addition to hitting its 52-week high, rates highly in the estimation of CAPS investors. Every stock but one, that is: Valhi.

Val who?
Valhi. If you haven't heard of it, don't be embarrassed -- no one on Wall Street has, either. Valhi boasts a $3.5 billion (that's right -- with a "b") market cap, but not a single Wall Street analyst tracks it. And perhaps that explains why the stock has been able to surge 102% over the past year without anyone hitting the brakes. That said, our CAPS players are tapping the brakes furiously. Here's what three of our All-Stars have to say about the company:

The bear case against Valhi
PopsDaniecki acknowledges: "The commodities effect may keep this one going upward for a time but I feel like this is just going to take a bit of a resettle with the P/E where it is today and the price high of where it is to date. Short into the summer and reassess."

Guffrey criticizes Valhi for its 1.61 debt-to-equity ratio, along with, "negative profit margin (ttm); negative ROE (ttm); etc.," but gives kudos to "the incredibly small float ... 94% controlled by insiders." (It's a subsidiary of Contran.)

tenmiles seconds that negative emotion, warning: "Debt-laden Valhi likely to become ValLow within next several quarters ... fundamentally fully valued here, while technicals suggest 4-5 point drop likely before year end."

I tend to agree. Valhi's rise appears tied to the scandal over lead-painted Chinese toys, and Valhi's role as a manufacturer of titanium dioxide, which can be used in lieu of lead. Investors may be betting that Mattel's (NYSE:MAT) and Hasbro's (NYSE:HAS) toy suppliers will send more money Valhi's way in future years as they seek to touch up their own scarred reputations.

But while I admit that's a possibility, the numbers suggest to me that investors' enthusiasm over the prospect is overdone. Unprofitable last year, Valhi's free cash flow has declined in each of the past three years. Unsurprisingly for a cash-burning enterprise, cash levels have dropped and debt has risen. And while the company pays a dividend (which makes shorting it an expensive proposition), the forward yield on that dividend is now just one-third its trailing five-year average. Seems to me that shareholders are getting paid less and less to own a worse and worse business. In that case, Valhi's stock may prove as toxic as the lead its products are meant to replace.

Time to chime in
Of course, the aim of this column isn't just to tell you what I think about Valhi -- or even what other CAPS players are saying. We really want to hear your thoughts. Click on over to Motley Fool CAPS and tell us what you think.

Motley Fool CAPS : It's fun, it's free, and it just might make you famous.