"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.
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Companies
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Recent Price
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CAPS Rating (out of 5):
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Mechel OAO (NYSE: MTL )
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$23.50
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****
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Brigham Exploration (Nasdaq: BEXP )
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$15.42
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***
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Advanced Micro Devices (NYSE: AMD )
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$7.87
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**
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Select Comfort
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$7.45
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**
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American Axle
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$8.70
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*
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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, but can they maintain momentum through the rest of the millennium?
A survey of our 150,000 CAPS members suggests the prospects for many of last year's stars look bleak. But there's one stock star they expect to see still shooting 'cross the skies when December 31, 2010, rolls around. Let's find out if they're right, as we examine …
The bull case for Mechel OAO
Never heard of Mechel? Then allow CAPS member hembreeder to introduce you: This Russian conglomerate "sells steel, coking coal, gas and other products worldwide but is especially strong in Eastern Europe, which has stabilized economically and will begin to grow again."
aw2129 agrees, predicting back in September that: "Basic materials will bounce back, and Russia being a BRIC country will do well."
Why Russia? StocksOnViagra argues that: "Demand for steel in Russia is expected to be high in the coming years. Mechel and its subsidiaries have implemented a $5.2 billion investment program for 2008–2012 ... The investments should increase total steel capacity by 35% to 6.5 million tons, besides cutting costs through a complete changeover to concasting."
Fools rush in …
But the real question here is whether you should rush in where so few Fools fear to tread? After all, steel stocks have been a bit of a mixed bag lately. U.S. Steel (NYSE: X ) may be trouncing the market averages, but Steel Dynamics is a market laggard as of late, and Nucor (NYSE: NUE ) has actually declined in value over the past year.
Of course, Mechel seems to be profiting more from its non-steel-making side-business. One of the reasons this stock has so vastly outperformed the market over the past year, I suspect, is that like U.S. analogs Peabody Energy (NYSE: BTU ) and Patriot Coal (NYSE: PCX ) , Mechel derives much of its revenues -- and most of its profit -- from mining coal.
... but I fear to tread here
Personally, I see a bright future for coal as the world economy revives, and corporate leaders bow to the inevitability of using whatever fuel is cheapest to keep their factories humming -- but that doesn't mean I'm bullish on Mechel. To the contrary, while the macroeconomic story looks sound here, the stock price at Mechel is quite a bit higher than I'd like to see.
Foolish takeaway
Unprofitable under GAAP accounting and generating only $263 million in free cash flow over the last 12 months, Mechel looks richly priced at more than 37 times free cash flow. Meanwhile, the company's toting a coal-train-load of debt at its caboose-end -- more than $5 billion net of cash reserves. Tack that onto the firm's market cap, and you're looking at an enterprise valued at a whopping 57 times the amount of cash it generates in a year -- way, way more than anyone should pay for an anticipated five-year 11% grower like Mechel.
All of which leads me to conclude: Mechel's rocket stock days are behind it. From here on out, this stock's a dud.
Which is not to say that you must agree. To the contrary, if you've got a different take on Mechel and its prospects, we want to hear it. Click over to Motley Fool CAPS now, and tell me why I'm wrong.
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