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. Every day, investors read the list and tremble -- some with greed, others with terror. Within our Motley Fool CAPS investing community, these top stocks generally 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 Friday last week. 52-week low and recent price provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

Huh? Stocks go down, too?
Mr. Market sounded a wake-up call last week, as fears of an SEC-led witch hunt against Goldman Sachs reminded investors that stocks can go down as well as up (and fast!). Yet, even as Goldman plunged 13%, scores of stocks continued climbing higher.

Each of the five named above hit a year-long high last week, but will any of them climb higher? Reviewing the prognoses of our CAPS community of investors, the future seems dim. But there's one company that continues to light up the human network with prospects for profit.

Cisco Systems
Why buy Cisco? CAPS member homsarrunnernet tells us that: "Cisco is on every desk of every worker at a fortune 500 company I work for ... but that's not why I love them. Tech, tech tech! Nobody is better positioned to benefit from expanding broadband."

TMcFarlandVT agrees: "Their development of ultra high speed Internet routing will rev up their future gains."

According to urogunner, "As the economy improves and companies update their technology I think the tech stalwarts will beat the S&P 500."

It certainly seems to be playing out that way elsewhere. The perpetual bellwether of the tech sector, Intel, reported a monster quarter last week that sent its shares skyrocketing. While not dispositive, that news does seem to suggest the kind of resurgence in tech spending that our CAPS members have predicted.

But is it enough?
Even if we assume the macro thesis is intact and bodes well for Cisco, I would argue that this company's improving fortunes are already priced into the stock. Selling for 26 times trailing earnings, and nearly 22 times free cash flow, Cisco appears to be priced for growth far exceeding the 12.1% per year that analysts think likely over the next five years.

To my Foolish eye, we'd need to see Cisco exceed its projected growth rate by a factor of two in order for the stock to be fairly valued at today's price. Absent that, the stock would need to fall in value by as much as a third before it begins to look attractive.

Mind you, I'm not necessarily predicting such a decline, or suggesting that you short the stock in expectation of it happening. To the contrary, as we all know, the market can remain irrational much longer than we can remain solvent. All I'm saying is that unless and until investors regain some measure of sanity as regards the price they're paying for Cisco shares, you should refuse to join in the insanity.

And what should you do in the meantime?

Seek your bargains elsewhere. For example, while it still looks pricey to me in its own right, rival Juniper Networks (Nasdaq: JNPR) at least appears to be a relative bargain compared to Cisco. And another of the tech king's rivals, Hewlett-Packard (NYSE: HPQ), looks downright fairly priced after last week's postdowngrade sell-off.

Foolish takeaway
Here in Dow 11,000-land, bargains are getting harder to come by. But the last place you should be looking for them is among stocks that have already enjoyed their run-up.

Disagree? Feel free. If you know of a hot stock that will keep on winning, come over to Motley Fool CAPS, and tell us about it.