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, according to the smart folks at finviz.com, have more than doubled since the beginning of this year, and just might be ripe to fall back to earth.

Stock

Recent Price

CAPS Rating
(out of 5)

Atwood Oceanics  (NYSE: ATW  )

$32.69

*****

Brocade Communications  (Nasdaq: BRCD  )

$7.65

****

SIRIUS XM Radio  (Nasdaq: SIRI  )

$0.60

**

Advanced Micro Devices  (NYSE: AMD  )

$5.31

**

Dendreon (Nasdaq: DNDN  )

$26.42

**

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. Current pricing provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

Each of these stocks has reaped huge rewards this year, but if you ask the 140,000 investors working odds on Motley Fool CAPS, there's a good chance that the good times are at an end -- for some of these stocks, at least.

Fools do still like the chances at Brocade, and like Atwood even better. Why? That's what we're about to find out, as we drill down into ...

The bull case for Atwood Oceanics
CAPS member mrmok starts us off by stating the obvious case for this oil services company: "We will continue the need for fossil fuels until fusion becomes a viable option." (And if you know of a good cold fusion company to invest in, drop me a line.)

That's the big picture bull thesis. But oil services is a "big lake," populated by the likes of big fish Halliburton (NYSE: HAL  ) and Schlumberger (NYSE: SLB  ) . Why should we prefer Atwood over the giants of the industry? ssbb123 explains: "Specializing in deep water drilling, making revenues per rig of $500,000 per day!! This is a long term play as oil becomes scarce the big boys are going to look to [Atwood] to reach hard to get to oil and gas pockets (or take over the company) either way its a win win."

What's more, MLIA0M09 says that when you "[c]ompare to Transocean this is one has much more growth potential. Personally I like them both but future for oil is uncertain ... I just can't believe that the pe of [Atwood] and other big oil companies now a days... single digits."

And yes, "single digits" does sound pretty good. But mightn't this stock be cheap for a reason?

That's the question that bugged me about Atwood, and after taking a close look at the cash flow statement, I think I've found the reason: That single-digit P/E is an illusion. Atwood's not nearly as profitable as it looks.

You see, Atwood reported some $277 million in profit over the last 12 months. Over the last 20 quarters (or five years), it's reported more than $672 million in profit. But would anybody want to hazard a guess at how much actual free cash Atwood has generated in the production of so much profit?

Answer: About negative $117 million total over the last five years. And over the last 12 months, Atwood actually burned cash -- nearly $190 million worth of the stuff.

Foolish takeaway
When you get right down to it, folks, this stock's a dud. A supposedly profitable driller that, over the course of one of the biggest oil booms in recorded history, was unable cumulatively to eke out honest-to-goodness positive free cash. A company that -- now that the boom has gone bust -- is burning cash faster than your Hummer burns gasoline.

So if you own Atwood now, and have benefited from this year's run-up, my advice is simple: Get out while the getting's still good.

Disagree? Feel free. Click on over to Motley Fool CAPS and tell me why I'm wrong.

Fool contributor Rich Smith does not own shares of any company named above -- but Motley Fool Stock Advisor has recommended Atwood Oceanics. Need any more proof that Fools are free to disagree?

You can find Rich on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 650 out of more than 140,000 members. The Fool has a disclosure policy.


Read/Post Comments (18) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 05, 2009, at 3:26 PM, 1crazyhorse wrote:

    Boycott any product advertised on this website.

  • Report this Comment On October 05, 2009, at 3:29 PM, 1crazyhorse wrote:

    I will be closing my account at Scottrade and will no longer shop at Wal-Mart because they support the Motley Fool den of thieves.

  • Report this Comment On October 05, 2009, at 4:16 PM, SIRIDoom wrote:

    Boycott Seeking Alpha bios censorship

  • Report this Comment On October 05, 2009, at 4:17 PM, SIRIDoom wrote:

    SIRI peril of a rev-split. I can't day trade SIRI because Mel Karmacrook has permission and need to rev-split for NasdaQ compliance. SIRI is off limits even for day trades.

  • Report this Comment On October 05, 2009, at 4:30 PM, hotkarlito wrote:

    Hats off to MF for almost making it a full day without bashing SIRI!!! What are they going to write about when SIRI reports solid 3Q numbers and/or avoids the "dreaded" reverse split?

  • Report this Comment On October 05, 2009, at 4:37 PM, slowtrain79 wrote:

    This analysis of ATW is awful. It is obvious to me that the author has little knowledge about the deepwater drilling industry or ATW in particular. This is a perfect example of why you can't make an investment decision solely on the basis of glancing at the balance sheet. It is crucial that you KNOW the business. This company does, in fact, generate lots of cash. They have, however, spent over 400 million dollars in the last ten years on upgrading it's fleet. They also have a new rig coming online next year, the Atwood Osprey, which total cost to mobilize will come in around 600 million. They already have a 3 yr contract in place once the rig is completed with a dayrate of 450,000-470,000). This is a 3yr contract with an option for 3 additonal years. The company has top-flight management. They have used the boom over the last several years to upgrade their fleet and position the company for long-term growth. There is way more upside to this stock than downside, in my opinion.

  • Report this Comment On October 05, 2009, at 4:37 PM, cantbefoolish wrote:

    They'll probably post this again: http://www.fool.com/investing/high-growth/2009/03/04/the-pre...

    At the time MF posted that, SIRI was around .13. Now that the stock is at .60 and we had cash for clunkers, does MF really believe the president had a secret plan to destroy Sirius/XM?

  • Report this Comment On October 05, 2009, at 4:39 PM, drnico wrote:

    i had not read slowtrain79 comment before i posted but as my comments show we are on same track..this author has no clue what he is talking about...its like comparing a tech company with an industrial company based on book value..

  • Report this Comment On October 05, 2009, at 4:50 PM, dab007 wrote:

    i do not believe selling this stock now would be a good idea at all last quarter they blew away earnings estimates .They also have 45% profit margin which they used last quarter to reduce their debt to equity ratio from 24% to about 12% if they hadnt reduced it so heavily they would have all kinds of cash flow .there long term growth over 5 years is estimated at 30% with a pe under 10 this an next year I and vector vest say strong buy.its also a 5 star caps rating

  • Report this Comment On October 05, 2009, at 5:24 PM, spr0949 wrote:

    Fools parade!!

  • Report this Comment On October 05, 2009, at 5:31 PM, ssbb123 wrote:

    Seeing as I was mentioned in this article I thought I would comment.

    The author has no idea what he is talking about, this is one of the stocks I did a lot of research on before I bought and clearly the author has done very little but look at the balance sheet. The market cap of 2 billion and the backlog of orders of $1.2 billion got my attention the most. With the low hanging fruit being tapped out, this company is in the perfect position to reach the difficult, deep pockets of oil.

    As i pointed out to one person who said that the search for alternative fuel will kill this stock. Oil is a necessity and is not just used for petroleum and to lubricate your engine. Everything plastic requires oil, fertilizers, ink etc so oil is not going anywhere soon.

    The automotive industry may start mass producing affordable long distance electric cars in the next 10 years but is everybody going to rush out and buy one immediately? the answer is it is very unlikely.

    I will hold this one for the next 3-5 years and then consider selling it depending on the factors surrounding the oil industry not based on an uneducated guess by this author.

    Oh did I also mention this was a top pick on Motley Fool stock adviser just last month.........OOOPS

  • Report this Comment On October 05, 2009, at 6:44 PM, yahoomania wrote:

    I can NOT believe that Motley Fool is an actual business! The only reason I even heard about them is their incessant bashing of SiriusXM, day in and day out. Give it up, for the love of God!!!! They are the most partial media format I have EVER read. They should be investigated. As a matter of fact, I think I'll drop the SEC a little note.....

  • Report this Comment On October 05, 2009, at 11:05 PM, pcshare wrote:

    Is Michael Moore the CEO of Motley Fool?

  • Report this Comment On October 06, 2009, at 4:06 PM, KwikiBoy wrote:

    Thats more of the responsible journalism we're used to. Lets survey the senior center as well as the CAPS next time, because I hear they have a lot of opinions to express too. The above quoted article was written LAST YEAR, Oct. 22, 2008.

    This is why I decreased my Motley Fool Subscriptions from 7, to 1 -- and its on the way out.

    I wonder what the statistics on CAPS being right are. How many lost money last year? How many didn't survive to remain CAPS this year.

    Why don't you just poll the lunch room? Apparently, you have your writing thesis, and you don't care where your supporting data comes from. Oh, and make sure you tell your friends to short the stock first. Or, you already did that?

  • Report this Comment On October 06, 2009, at 4:06 PM, rhamp wrote:

    Handsgrue,

    I have to hand it to you, you do your research. Of course copy and pasting from an article from one year ago that has NOTHING to do with the current state of the company is about as useful as SIRI-doom's posts but at least you took the time to copy and paste. Thanks.

    I like the note about money without intelligence, and nothing screams intelligence like basing an investment plan with information that is over a year old.

  • Report this Comment On October 06, 2009, at 8:00 PM, JWILLI44 wrote:

    lol....They bashed the company and said it was a bad investment when it was going up....They never advised their readers to buy SIRI.....Now that it doubled ...they say it is too late ...You miss the big gains.....WTF!!! When this stock doubles again....Maybe they will write an article saying...This stock is bound to go down now....It will return back to the $.80 level ....what is the point of these guys? Can they apologize to their readers for not advising them to buy these stocks...instead of telling people they either missed the ride up...or trying to get people to sell now..so the stock can go down....lol...like they predict...Motley Fool....= terrible stock maniupulators....No helpful tips....Need to shut down...or just become a comedy show.....

    Oh...why don't you find more list of stocks that did very well....And magically predict that some of them will now go down!!!lol...are you kidding me?

  • Report this Comment On October 07, 2009, at 10:45 AM, stkdn wrote:

    They are still shorting this stock,they will never stop until the car industry or something else major happens to shake up this company. It is a stock that has disappointed a lot of people,and rightfully so. It has been trying to make a dollar forever. Will it ever is up to Mel K. Liberty has to be crazy. Sorry,but this stock just cannot get past the penny mark,what a dud.

  • Report this Comment On October 08, 2009, at 4:24 PM, CEO007 wrote:

    Dendreon could be a real sleeper, a $2 Billion Dollar Company once it gets FDA approval almost overnight. so stay tuned!!

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