Get Ready for the Fall

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"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 110,000 stock gurus (and counting) in CAPS have to say about the list's latest contenders:

Stocks	One Year Ago Today	Recent Price	CAPS Rating (out of 5):
Bronco Drilling  (Nasdaq: BRNC)	$16.95	$18.42	*****
Qualcomm (Nasdaq: QCOM)	$42.63	$49.84	****
Staples (Nasdaq: SPLS)	$24.99	$25.37	****
Strayer (Nasdaq: STRA)	$126.62	$213.97	***
Cyberonics  (Nasdaq: CYBX)	$17.44	$21.25	**

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 from Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

Everybody loves a winner
When stocks soar on the wings of success, bears become rare. Little wonder, therefore, that the majority of the stocks making today's list enjoy above-average marks from investors. But there's one stock here that doesn't make the grade. Do CAPS players know something we do not? Is Cyberonics headed for a fall?

Let's find out.

The bear case against Cyberonics
NetscribeHealthC introduced us to the company early last year:

Cyberonics is a neuromodulation company engaged in designing, developing and bringing to market medical devices that provide Vagus Nerve Stimulation (VNS) Therapy, for the treatment of epilepsy, treatment-resistant depression (TRD) and other debilitating neurological or psychiatric diseases, and other disorders. ... In July 2005, FDA also approved the VNS Therapy System. ... However, Cyberonics will remain a company that is struggling commercially. ... Its epilepsy business has low prospects for future growth, as new patient sales have remained flat.

Looking at the company around the same time as NetscribeHealthC, CAPS All-Star hirshey came to an equally negative conclusion, commenting that the company carries "[f]ar too much debt."

Cyberonics' cash-debt situation hasn't changed much since CAPS' hirshey panned it in January 2007. And though its debt load does not look excessive relative to the burdens that competitors such as Shire (Nasdaq: SHPGY) and Cephalon (Nasdaq: CEPH) bear, Cyberonics has one issue that those two do not: negative free cash flow.

Although that negativity has moderated in recent quarters as Cyberonics cut back on its selling, general, and administrative expenses, sales have fallen as well and have declined on a year-over-year basis for four straight quarters. Until red turns to black, the company cannot help but watch its cash reserves dwindle and the quality of its balance sheet deteriorate.

Mind you, I don't think Cyberonics is in any immediate danger. By keeping cash burn in check, the company could well navigate the downturn while waiting for sales activity to tick back up. But until that happens, I expect the stock to remain on life support.

Time to chime in
Disagree? Feel free. Just head on over to CAPS, and tell us why.