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, 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 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 125,000 stock gurus (and counting) in CAPS have to say about the list's latest contenders:

Company	One Year Ago Today	Recent Price	CAPS Rating (5 stars max)
O'Reilly Automotive  (Nasdaq: ORLY)	$27.82	$32.71	****
IAMGOLD (NYSE: IAG)	$7.28	$8.46	****
Odyssey HealthCare	$8.34	$12.16	***
HMS Holdings	$28.08	$34.68	***
ICU Medical  (Nasdaq: ICUI)	$27.49	$35.35	**

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

"Everybody loves a winner"
Well, maybe not everybody. While you might expect investors to sing the praises of any stock that manages to hit a high in this market, the truth is that investors are really only enthused about the prospects of O'Reilly Automotive and IAMGOLD. The other stocks on this list ... well, they're not faring so well despite (or perhaps because of) their soaring stock prices.

CAPS members think the prognosis looks worst for ICU Medical, a small-cap maker of catheters, I.V. systems, and similar medical equipment. Although ICU Medical has some big names in its customer book -- Abbott Labs (NYSE: ABT) and Hospira to name a couple -- it also competes on a field dominated by giants such as Baxter International (NYSE: BAX), Boston Scientific (NYSE: BSX), and Cardinal Health (NYSE: CAH).

With so much competition ahead of it, nearly one out of three CAPS members who've rated the stock believe ICU Medical is destined to underperform the market. And when you listen to the opinions voiced by our very best investors -- the CAPS All-Stars, the votes split almost right down the middle: eight for, and seven against ICU Medical.

The bear case against ICU Medical
What's got Fools so down on the company? Actually, that's a bit of a mystery. Only two Fools have penned "pitches" panning the company:

• CAPS All-Star investor Jeltje, who noted: "insider selling on Dec 8."
• And way back in early 2007, richbatt sounded the alarm after seeing a: "Classic early warning sign: A/R and inventory growing much faster than sales."

And that's it. Not a whole lot to hang a "sell" thesis on, so let's see if we can flesh this one out some?

Turns out, that's not hard to do, because the way I look at it, the bear case against ICU Medical begins and ends with valuation. The stock sells for a P/E of 21 based on its GAAP earnings. Quality check that number by running a valuation based on cash profits, and you'll find the stock selling for a similar enterprise value-to-free cash flow ratio: 22. Either way, the price seems a bit high for a company that Wall Street expects to post only 10% annual growth over the next five years.

As for the concerns richbatt raised last year, ICU Medical management has done a fine job of fixing its inventory issues. By year-end 2008, those had shrunk 8% compared to their year-end 2007 level. Not bad at all for a company that grew its sales 9%. Accounts receivable, in contrast, still raise concerns -- up 47% year-over-year, or much faster than sales. But with inventories clearly under control, I consider the A/R issue no more than a yellow flag, not red.

Last but not least, for anyone worried that ICU Medical is going under as the recession persists, think again. This company's balance sheet is rock solid, boasting more than $110 million in cash, and no long-term debt.

Long story short, I'm not enthused by ICU Medical's valuation, and I wouldn't overpay for it myself -- but the business per se looks pretty healthy to me. Most important to the purposes of this column, I do not believe the stock is doomed to fall. Overpriced stocks can remain so for years as they grow into their valuations. They don't necessarily have to "pull a Google" and fall back to Earth.

Time to chime in
Of course, the aim of this column isn't just to tell you what I think about ICU Medical -- or even what other CAPS players are saying. We really want to hear your thoughts. Do you see something wrong with the business that the rest of us have missed? A reason to sell ICU Medical over and above the high stock price? Click on over to Motley Fool CAPS and tell us what you think.

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