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 in the last half of '09, and just might be ripe to fall back to earth.

Companies

Recent Price

CAPS Rating
(out of 5)

Huntsman Corporation (NYSE: HUN  )

$12.19

*****

Advanced Micro Devices (NYSE: AMD  )

$7.46

**

UAUA Corp  (Nasdaq: UAUA  )

$12.23

*

Pilgrim's Pride  (NYSE: PPC  )

$8.87

*

Revlon (NYSE: REV  )

$15.41

*

Companies are selected by screening for 100% and higher price appreciation over the last six months on finviz.com. Five stars = highest possible CAPS rating; one star = lowest. Current pricing provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

Last year's last-half market rebound was kind to these stocks, to be sure. But now that Mr. Market has reached out, tapped us on our collective investing shoulder, and reminded us that stocks can go down as well as up, the question becomes more urgent: How many of these stocks can keep on winning?

We've polled our 145,000 CAPS members for their thoughts and, well, the results aren't encouraging. Turns out, Fools don't think very many of these companies can keep up the good work. There is one stock, however, that they believe will keep powering higher, and its name is ...

Huntsman Corporation
You remember Huntsman. This chemical concern's name topped the headlines last year, as a market collapse that nearly killed Dow's (NYSE: DOW  ) deal to buy Rohm & Haas did kill Apollo Management's desire (through subsidiary Hexion) to own Huntsman. But CAPS member mypieceofpie believes that with the buyout kerfuffle behind it, Huntsman is now "aggressively expanding their business across the world and will be in all the right places when the global economy turns."

Backing out of its purchase agreement cost Apollo $1 billion in breakup fees owed to Huntsman, and to its credit, Huntsman's not being stingy with its newfound wealth. CAPS All-Star tomfoolme points out that in addition to being priced to move, the company pays out a 3.2% dividend to its shareholders. And Optionus concludes: The "Lawsuit has blown over. Reliable company with a low P/E. No reason to beleive this company will do anything but grow long term."

I agree. Rival chemist DuPont (NYSE: DD  ) just wowed the market with a blowout fourth-quarter report -- and when Huntsman reports later this month, it could well do the same. Expectations for the company, after all, look exceedingly low: Analysts have the stock priced at just 5.5 times earnings as of this writing, and barely two times free cash flow, perhaps distressed at the prospect of earnings growing at just 3% per year over the next five years.

Now hold up a sec ...
I know, I know. The earnings and the free cash flow are both inflated by the litigation payoffs -- er, I mean payouts -- that Apollo is sending Huntsman's way. So let's look at a couple alternate valuation metrics as well.

From a price-to-sales perspective, Huntsman looks cheap relative to the competition. Its 0.38 P/S ratio compares favorably to Dow's 0.72, and even favorable-er to DuPont's 1.09. On a price-to-book basis, too, Huntsman comes out in the middle of the pack. Its 1.7 P/B ratio comes in a bit behind Dow's 1.5, but trades at a whopping 60% discount to DuPont's 4.1 P/B.

Foolish takeaway
Pretty much any way you look at it, Huntsman looks like a steal at today's price -- yes, even after more than tripling in value over the last year. (I can only imagine the gnashing of teeth and kicking of-self going on over at Apollo Management right now...)

My advice: Pity Apollo if you like. Just make sure it's not you grumbling in regret this time next year.

(Got a contrary opinion on Huntsman? We've got a place to give it voice: Click over to Motley Fool CAPS now, and tell us all about it.)

Fool contributor Rich Smith does not own shares of, nor is he short, any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 635 out of more than 145,000 members. The Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (10)

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 February 01, 2010, at 2:28 PM, funfundvierzig wrote:

    "...DuPont's blowout fourth-quarter report"?

    Keep in my that $247 million of DuPont's Q4 2009 Pre-Tax Operating Income came from two drugs whose patents expire this year, 2010. That $247 million was a third of total PTOI of $743 million for the quarter.

    Moreover, DuPont Management disclosed that 10 cents a share factored into their hiking the outlook by a nickel to $2.15 to $2.45 per share for 2010 came from a reduction of pension expense, "lower than originally anticipated." A rising stock market, over which DuPont's "leaders" had no control helped bail them out.

    ...funfun..

  • Report this Comment On February 03, 2010, at 2:44 PM, Boscobomber wrote:

    Excellent article but a year too late. I bought Huntsman last year and caught it near the bottom and have seen it triple. Will it go back to the low $20's? I believe so as most chemical companies are ripe for big profits as oil prices keep sliding south. Too bad I did not jump in with Ashland - they did even better than Huntsman. However, after Huntsman reports record profits, the stock should spike another $2/share. Want to make it go higher? Announce a dividend increase.

    What did they say in the 60's? Plastics, my son, get into plastics. At least for the next 12-36 months.

  • Report this Comment On February 13, 2010, at 5:26 AM, Funfunchaser wrote:

    Change the record.

    We have heard this song before.

    Good investment advice does not come from disgruntled ex-employees.

  • Report this Comment On February 13, 2010, at 5:26 AM, Funfunchaser wrote:

    Dupont is on FIRE!

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1099342, ~/Articles/ArticleHandler.aspx, 12/17/2014 3:04:15 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement