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. (And if the company was less than great in the first place...) Below, I list a few stocks that may have done exactly this. According to the smart folks at finviz.com, these stocks have more than doubled over the past year, and they just might be ripe to fall back to earth.

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.

According to many investors, these three stocks that have climbed so high are bound to climb even higher. CAPS member mrhineheart, for example, puts his hopes for IDT into rhyming form: "Debt is low and cash is high. Price/Sales is .29. Buy! Buy! Buy!" Similarly, CAPS All-Star jed71 argued earlier this year that with "$2.3BB in real estate assets (most likely somewhat understated due to accounting practices)," IDT "looks to be a potential takeover candidate." (No such luck yet, but I doubt jed's all that upset -- the stock has more than doubled since he picked it just six months ago.)

That said, with Strategic Hotels having more than tripled in just a year's time, and IDT up more than six times in value, a consensus seems to be building on CAPS that these two stocks, at least, are close to ending their run. Not so with Oclaro.

The bull case for Oclaro
Boasting an above-average four-star rating on CAPS, Oclaro stands head-and-shoulders above the other stocks on this week's list, but if you're wondering why ... you're not alone. Few CAPS members have written on the stock in detail -- at least, not recently.

mukherjeepicks highlighted the company's "qtrly Revenue Growth 115.70%" back in March, while glenmayfield20 praised the company's "cutting edge technology" in February. But honestly ... no one's really made a compelling case for why the company deserves "four stars," or why it might be a "buy."

Get to know Oclaro
So let's see if we can't fill in a few blanks on our own. First off, the name. Coming upon the stock on my screener this week, I was not immediately familiar with the name "Oclaro." Turns out, though, Oclaro is actually a merger-spawned scion of another company I do know: Bookham. You may remember this name winning praise from CNBC's Jim Cramer a few years back. The optical communications equipment parts-maker supplied lasers, optical amplifiers, transmitters, and receivers to such giants as the late Nortel (now largely owned by Ciena (Nasdaq: CIEN), and Cisco (Nasdaq: CSCO).

Now, considering how badly the market got spooked by Cisco's earnings results earlier this month, and how investors dumped optical networking peers Ciena, Finisar (Nasdaq: FNSR), and JDS Uniphase (Nasdaq: JDSU) in response, you might worry about Oclaro doing pretty poorly lately. But in fact, while business is not exactly booming, the company is at least profitable where JDS and Ciena are not, and profitable enough to carry a lower P/E ratio than Finisar.

Oclaro's also doing pretty well on the one metric I find even more instructive than GAAP profitability -- free cash flow. Its most recent cashflow numbers won't be released until Oclaro files its 10-K with the SEC, but already I can see a years-long trend of steadily decreasing cash-burn at the company. If it turns out the trend held steady into Q4, this year could end up being the first year ever that Ocular generates positive free cash flow from its business. This could be the year that the company finally turns the corner.

Foolish final thought
With this prospect in mind, I think I can see why investors are so bullish on Oclaro. But until the exact numbers come out, I'd be kidding you if I said I was doing any more than guessing at that. So ... help a Fool out, why don't you? If you know Oclaro, and have an idea of where it's heading from here on out, we'd love to hear your opinion about the company.

Click over to Motley Fool CAPS now, and tell us what you think.