"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.
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 them moving upwards.
Unfortunately, if the price goes up too much, even a great company can turn into a lousy investment. And if the company was less than great in the first place....
According to the smart folks at finviz.com, the following stocks have more than doubled over the past year, and they just might be ripe to fall back to earth:
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Company
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Recent Price
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CAPS Rating (out of 5):
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Akamai (Nasdaq: AKAM )
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$44.22
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****
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VMware (NYSE: VMW )
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$76.38
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***
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Baidu (Nasdaq: BIDU )
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$82.83
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**
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Companies are selected by screening for 100% and higher price appreciation over the last 12 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.
The Three Musketeers of growth
By rights, members of our Motley Fool Rule Breakers growth investing service should be jumping for joy. Three of our favorite stocks dominate the rankings of the hottest growth stocks on the planet. But this does pose us a quandary.
Sure, if you already own the stocks, your portfolio's looking plump, and you're probably a very happy camper. But what if you don't own them? What if you're looking to buy, and trying to decide which one?
If you ask CAPS All-Star traviskang, he'll probably tell you that Baidu's the one to own, pointing out that it's already the biggest name in search in China, "the biggest and fastest growing Internet market in the world." Baidu also boasts a "talented management team, earnings have been growing faster than analysts can predict..."
But philnj begs to differ. Praising VMware over Baidu, philnj notes:
VMware's product are first class. Many competitors but no one has a platform as trusted. With the massive growth in Virtualization, this is an absolute win...
And then there's Akamai. The stock has been on an absolute tear this month, while both Baidu and VMware are showing signs of weakness. In addition, most investors on CAPS seem to prefer Akamai over the other two RB stocks named above. Is that the right call?
The bull case for Akamai
dantak thinks so, arguing that "Video on demand to iPhone and other wireless devices will grow," and with it, Akamai's traffic and revenue.
CAPS All-Star TomFrog agrees, noting that "Akamai has a huge lead in the content-delivery space, which becomes more and more important as media disintermediates."
And tom33952 (Akamai seems to be a favorite of people named Tom), calls the company "uniquely positioned to gain from the shift to distributing video content via the Internet; no close competitors."
Companies like Digital River (Nasdaq: DRIV ) and Limelight Networks (Nasdaq: LLNW ) might take issue with that contention. Both list Akamai as a rival. But even if they're wrong, and our CAPS posters are right, a lack of "competition" isn't always all it's cracked up to be.
Sure, it can lead to high multiples, as investors pay up to join the only game in town. Akamai sells for 54 times trailing earnings and 28 times free cash flow. That's great as long as things keep growing fast, but according to most analysts, Akamai's only capable of growing at about 16% per year over the long term. While that's certainly respectable, it's quite a bit slower than either VMware or Baidu.
And what happens when regulators start looking askance at the monopolist's dominance? We've already seen what regulatory and litigious hobbling have done to the once-dominant Microsoft (Nasdaq: MSFT ) . Lately, we've seen regulation do a number on Google as well. Will regulators soon ask why Akamai has "no close competitors," and begin taking steps to rectify that situation?
A Foolish final thought
If and when "something bad" of this sort happens to Akamai, chances are it will at least tap the brakes on Akamai's growth prospects. With the stock already selling at what seem to be exceedingly optimistic multiples to current growth rates, this would not be good news for Akamai's stock price.
Long story short, I personally see no immediate threat to Akamai's growth plans. But considering the already high price tag on the stock, and the risks of regulation down the road, I'm not sure I'd want to be putting new money into the stock today -- not at a premium price, at least.
But that's only my opinion. Just because one particular Fool fears to tread here doesn't mean you shouldn't rush to buy Akamai. If you think my fears are overblown, tell us why. Click over to Motley Fool CAPS right now and explain why the price looks right to you, and why you believe this rocket will keep on rising.
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