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.

Now I readily admit that sometimes, stocks rise for a reason. But sometimes, the rise becomes the reason. No matter how often we caution them not to, investors do have a habit of buying "hot" stocks, and trusting momentum to keep 'em moving upwards.

Problem is, if the price goes up too much, even a great company can turn into a lousy investment. Below I list a few stocks that may have done just that. Stocks that have more than doubled since the beginning of this year, and just might be ripe to fall back to Earth.

Companies are selected by screening for 100% and higher price appreciation year to date on finviz.com. Five stars = highest possible CAPS rating; one star = lowest. CAPS ratings from Motley Fool CAPS.

Each of these stocks has reaped huge rewards this year, and if you ask the 140,000-plus investors filling the judges' stands on Motley Fool CAPS, most of these companies have room to run further. (Sorry, Alcatel -- no love for you.)

Quicksilver Resources edges out the competition with its five-star rating, however, so it wins the prize today. Read on as we examine:

The bull case for Quicksilver Resources

• CAPS All-Star sentinelbrit points to an "Announced success in drilling in Canada" as one reason to own Quicksilver, and argues that: "Further success seems likely. Gas price is low."
• But hold up a sec. Doesn't Quicksilver sell natural gas? Doesn't it want the price to be high? Fellow All-Star Lordrobot connects the dots in this seeming disconnect. Sure, gas prices are low now, but "Gas will not stay down forever and with a little gov gridlock the future will be brighter. Obama ... will have to ... make concession to natural gas and coal."
• And not to beat a dead horse, but yet another of our uber-investors -- Trimalerus this time -- explains further: "I'm loving Oil & Gas stocks lately because they have been trampled down by the market and they should be the first stocks to grow when the world economy recovers. Oil Peak is a beautiful thing if you can use it [to] your advantage."

So to sum up, they like Quicksilver today because it's being undervalued based on the price of its key asset. Once that asset's price rises, so too will the stock price. Sounds reasonable. But let's take a closer look at the valuation and make sure we all know that we're all on the same page here.

At the end of 2008, Quicksilver boasted 1,639.1 billion cubic feet of proven natural gas reserves. Incidental to its flagship "gas" business, the company also has about 94.8 million barrels of proven reserves of oil and natural gas liquids -- equivalent to about 569 billion cubic feet if converted at a common industry rate. So call it 2.2 trillion cubic feet equivalent.

Now traditionally, natural gas is priced in terms not of "cubic feet," but of the British thermal units produced by burning these "cubic feet" -- roughly 1,030 Btu per foot cubed -- and right now, the spot price is $3.43 per million Btu. So the value on these reserves works out to:

• 2.2 trillion cubic feet
• times 1,030
• divided by 1 million
• times $3.43 ...

Which equals: $7.8 billion. Meanwhile, Quicksilver itself carries an enterprise value of just $4.8 billion. Compare AtlasQuicksilverQuicksilver with a rival like Chesapeake Energy (NYSE:CHK), which has 12 trillion cubic feet of gas and equivalent oil reserves, and you'll see something similar -- Chesapeake's reserves are "worth" $42 billion; the company sells for a $31 billion enterprise value.

Call me a Fool, but when I look at these numbers I cannot help but agree that our CAPS members have a point. Assuming that all that natural gas and equivalents is easy (and cheap) to extract, the recent rebound in natural gas prices over the past few days has gas producers looking cheap again. What's more, while we've seen the premium attached to shares of United States Natural Gas (NYSE:UNG) shrink, the exchange-traded fund was trading at a small premium to its underlying assets last Friday.

Foolish takeaway
It doesn't take a rocket scientist to figure out this play, folks. If natural gas producers like Quicksilver are trading at a discount, while the artificial construct that is the United States Natural Gas fund has no discount at all, then I see no reason to buy the cheaper gas play. You tell me Quicksilver's up 100% already? I say this rocket's just warming up.

Disagree? Feel free. Click on over to Motley Fool CAPS and sound off.