Rocket Stock or Dud?

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

Every day, WSJ.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 just 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 these contenders:

Five stars = highest possible CAPS rating; one star = lowest. Companies are selected from the "New Highs & Lows" lists published on WSJ.com on Saturday of last week. One year ago and recent prices provided by Yahoo! Finance for the same date. CAPS ratings from Motley Fool CAPS.

"Everybody loves a winner"
So people say. But this week, winners are rarer than orange groves in Ontario. Just one stock -- one! -- closed at a new 52-week high on Friday: a little microcap jobber by the name of Consulier Engineering.

So how is it that we even have a list of "52-week highs" this week? Because over on the AMEX, at least, they don't just trade stocks, but exchange-traded funds (ETFs) as well. And some of those are soaring. But it won't take you more than a quick skim of the table above to learn that this is not good news. All five of the "stocks" listed above are short bets against various market niches. And what does this tell us?

Investors are shorting oil, shorting land, shorting the S&P -- even shorting the indefatigable American consumer.

Big mistake. Huge.
CAPS members think this is an extremely risky strategy. These ETFs have one thing in common, in that they represent short bets, but they also share below-average, one- and two-star ratings on CAPS. By massive majorities, Fools think it's (small-f) foolish to bet against the U.S. economy bouncing back.

Sure, short term, this strategy seems to be working out. But remember: When you bet on a stock, your profits are potentially limitless. Thanks to the miracle of compounding, $1,000 can grow into $1 million in a matter of just a few decades. In contrast, the best a short bet can ever yield is a 100% gain.

Need more convincing?
Say you had a crystal ball five years ago. Say you knew that over the course of five years, each of General Electric (NYSE:GE), Cisco (NASDAQ:CSCO), eBay (NASDAQ:EBAY), and Citigroup (NYSE:C) was destined to lose value -- and so you shorted them. Want to guess how much money you would have made?

If you shorted $1,000 worth of stock in each, then five years' of pessimism would have netted you a combined profit of $1,400, as GE lost 14% of its value, Cisco fell 18%, eBay lost 43%, and Citi plummeted all of 65% in price.

But what if, on the other hand, rather than shorting these four stocks, you had bought just one great stock back then -- say, Research In Motion (NASDAQ:RIMM)? In that case, RIM's 654% increase in value would have more than quadrupled your take from guessing right on the short side four times in a row.

Foolish takeaway
The bears are hungry these days, and the shorts are rampant. But there's a reason Fools look askance at the short ETFs so popular this week: We know that over the long term, buying great businesses with strong growth prospects is the surest path to profit.

Time to chime in
Of course, the aim of this column isn't just to tell you what I think about investing, ETFs, or shorting. We also want to hear your thoughts. If you think now's the time to bet against the market, come on over to Motley Fool CAPS and tell us why.