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 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 130,000 stock gurus (and counting) in CAPS have to say about the list's latest contenders:

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," but Applied Signal and Telecommunication Systems at least enjoy some popularity as their stocks climb steadily higher. Meanwhile, the spiking valuations on Family Dollar and AsiaInfo haven't hurt their ratings on CAPS much at all. Fact is, there's only one stock on today's list that investors just plain hate.

Let's find out why that might be, as we review …

The bear case against Theravance
star60629 seems to have set out looking for trouble -- troubled stocks that is -- back in 2007, writing that the "easiest way to find overvalued stocks" is to "go thru some biotechs. This one [is] way overpriced Rev 20 Mil shares 60 mil. Insiders selling. Book value $1. Muahhh look out below."

CAPS All-Star OtherOracleOfOMA agrees. Writing late last year, this member argued that there was "no possible way to justify a market cap of $558 million for a company with negative equity and negative earnings." I can only imagine what this All-Star would say to Theravance's current market cap of almost twice that sum. And I rather expect it would duplicate what fellow CAPS member jmacn22 wrote last month -- short and sweet, that pitch read: "Should underperform."

And yet, while Big Pharma stalwarts such as Merck (NYSE:MRK) and Pfizer (NYSE:PFE) slowly sink lower, Theravance has done nothing but out-perform -- despite a lengthening review process for the firm's drug candidate telavancin at the FDA. Might there be a reason for this?

Perhaps. But if so, it's got to be based more on future hopes than on any present-day, quantifiable valuation. Remember how star60629 criticized Theravance for having just $20 million in annual revenue a couple years ago? Well, two years later, the company's still pulling in revenue less than $23 million a year -- and reporting nearly four times that amount in annual losses. That gives the stock an on-its-face crazy valuation of nearly 50 times revenue -- let alone profits (which it hasn't got.)

The company has a couple hundred mil to tide it over till commercial success materializes, of course. But at the rate Theravance burns cash, that's good for only a couple of years at best -- and the company wouldn't even have had that, but for a potentially dilutive equity offering conducted last year. And although the company has strong financial backers in the form of Big Pharma majors GlaxoSmithKline (NYSE:GSK) and AstraZeneca (NYSE:AZN), my hunch is that investors will see additional equity offerings before this company ever sees anything resembling a profit.

Time to chime in
Of course, the aim of this column isn't just to tell you what I think about Theravance -- 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.

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