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 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 not always ...

Companies are selected from the "New Highs & Lows" lists published on WSJ.com on Thursday and Friday last week. 52-week low and recent price provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS, as of Aug.14.

Knives and knaves
Each of these stocks hit a new 52-week high last week. But peering down from that perch, some investors are starting to lose their nerve. Oh, Tellabs, Lubrizol, and Southern Copper score well enough among CAPS investors. But as you can see with Starbucks, not even a return to profitability has everyone convinced that this stock is worth 56 times trailing profits.

Still, the real surprise this week is our top-ranked stock. Let's learn more about it as we run an audit on ...

Bancolombia
The name probably says it all, but just to be safe, let's get a quick introduction to Bancolombia from alejoguerra who last year wrote: "No. 1 Bank in Colombia, top 10 in Latin America. ... Rapid internationalization: No. 1 in El Salvador (bought Banco Agricola), Peru with subsidiaries, Miami, Panama, Puerto Rico, Madrid. Growing profits."

CAPS All-Star tutaemeia echoed the sentiment back in December, calling Bancolombia: "the main bank in the country, [has] a solid structure and strong balance sheet, [good] manager and with a very good level of capital earnings with a Tier 1/core of [10.04]."

And javisan gave us a bit of local color earlier this year:

As long as [Colombian President Uribe] remains in power and [foreign direct investment] continues to flow into Colombia, the probability is high that the growth of the financial sector will continue. Uribe's second term has two years to go and supporters are already working to modify the constitution to allow a third term due to incredible accomplishments in security and financial stability. I expect that the Colombian exchange will continue to grow in capitalisation in concert with continued security.

Bancolombia sells for a price-to-tangible book value ratio of 2.6. That's more expensive than the 1.9 times multiple accorded to both Goldman Sachs (NYSE:GS) and Bank of America (NYSE:BAC). It's even higher than the 2.1 times ratio that JPMorgan Chase (NYSE:JPM) fetches. So why are these hometown heroes scoring just two and three stars on CAPS, while Bancolombia received the full five-star treatment?

Perhaps it's because when valued not on its assets, but on the profit it earns with 'em, this bank looks cheap. Selling for 11.3 times trailing earnings, Bancolombia compares favorably to B of A's 28 tiomes multiple; it's a steal relative to Goldman's 35 P/E or JP Morgan's 46.

Why are Bancolombia's earnings so much higher relative to its stock price? Because it just plain does a better job of using what it's got to generate big money for its shareholders. You can see this in the returns on assets and on equity in the last twelve months. Over that period, none of the big North American bankers named earned so much as 0.5% on its assets, and the best of the bunch, Goldman, earned just 4.3% on its equity. But Bancolombia scored an ROA of 2.1%, while its ROE of 21.3% put North America's best bankers to shame. Simply put, this is one incredibly profitable operation.

Time to chime in
How does Bancolumbia do it? I was tempted to say "volume," but I don't know. Seriously -- I don't. I know almost as little about South American business as I do about banking. You see, Warren Buffett tells us that an investor should never invest outside his "circle of competence." For Mr. Buffett, that means he can buy banks from sunrise to sunset (he just can't buy tech stocks).

But for me, well, I know a thing or two about defense contractors, and I've got a passing familiarity with a few other industries, but I couldn't pick a winning bank stock if my portfolio depended on it, so I don't try. (I know you don't often hear a supposed "financial writer" proclaim his ignorance. But this time, the shoe fits.)

And that, dear reader, is why you are here. Somewhere out there, someone certainly knows more about banking stocks in general, and Bancolombia in particular, than I do. So help a Fool out, will you? Click on over to Motley Fool CAPS now, and tell us what to do with this stock. We already know Bancolombia is expensive relative to American banks, but is it worth the price?

You make the call.