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, MSN Money 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 115,000 stock gurus (and counting) in CAPS have to say about the list's latest contenders:

Companies are selected from the "New 52-Week Highs" list published on MSN Money on the Saturday following close of trading last week. One year ago and recent prices provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

"Everybody loves a winner"
When stocks soar on the wings of success, bears are supposed to become rare. But what does it tell us when MSN Money churns out a list like the one above? Five stocks, each hitting a 52-week high -- and CAPS members hate every one of them.

Actually, "hate" may be too strong a word for some of these firms. Let's just say investors dislike Valeant, Medifast, and Kensey. But Associated Estates? Yep, that one investors hate. And USA Truck? They loathe it. A clear majority of CAPS members say that one's going down in flames, and not one of them has had anything nice to say about this highway freighter since ... February 2007.

The bear case against USA Truck
In April, CAPS All-Star deuspecuniae said: "A recessions a coming this summer and high oil prices are not going away since the falling dollar is to blame, and continued inflation is not going to bring the value of the dollar up any time soon. ... my point is to sell trucking since rail is about to take over from the high price of fuel."

So at least there's a bright side here -- what's bad for USA Truck should at least be good for Union Pacific (NYSE:UNP), CSX (NYSE:CSX), Canadian National Railway (NYSE:CNI), and Burlington Northern  (NYSE:BNI).

CAPS All-Star pnouri likewise panned USA Truck, writing in March:

This, and other micro cap truckers, are pricing in some sort of significant recovery in earnings in 2009. If you view this as unlikely, as I do, than it is easy to short these stocks. ... The more certain a recession is, the closer to its fair value this sector will get.

blade5adj takes the pessimism one step further, writing, "I see solvency problems in their future."

Ouch. First they use the "R" word. Then the "S" word -- implying the "B" word ("bankruptcy"). But is all this pessimism overdone?

Regretfully, no. While I'm not going to go tossing around the "B" word here today, I will say that the stock's valuation looks downright ugly. USA Truck has no trailing P/E ratio -- you need profits for that. If the analysts are right, and USA Truck earns some money next year, the forward P/E works out to 36 for a projected 15% grower. Let me repeat that, and make sure it sinks in: We're being asked to pay a 2.4 PEG ratio based on profits that haven't even been earned yet.

Foolish takeaway
Today's price is simply unsupportable, Fools. And you know what happens when a stock's price isn't supported by its prospects: It's ready for the fall.

Time to chime in
Or maybe I'm wrong. If you've got a bull argument to make for USA Truck, nobody's stopping you. To the contrary -- right now, USA Truck's CAPS page looks and sounds like nothing so much as a cage full o' bears, growling at each other. Come on over and give us the other side of the story.

I can practically guarantee you that if you do, you'll get prime billing as the "top bull pitch" in no time.