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 just this. According to the smart folks at finviz.com, these stocks have doubled (or nearly so) over the past year, and just might be ripe to fall back to earth:

Companies

Recent Price

CAPS Rating (out of 5):

OmniVision Technologies (Nasdaq: OVTI  ) $30.01 *****
Under Armour (NYSE: UA  ) $56.50 ****
Cummins (NYSE: CMI  ) $98.20 ****

Companies are selected by screening for 100% and higher intraday 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.

What do diesel engines have to do with athletic sportswear? What do either of these things have in common with the chips used in digital cameras? The companies behind these products are some of the hottest stocks on the Street.

Over the past year, shares of diesel engine maker Cummins have more than doubled in value, powered by a number of favorable trends -- the revival of customer Ford (NYSE: F  ) as an automotive force, strong auto sales in foreign markets, and investor anticipation of a surge in sales to the trucking industry next year. CAPS All-Star HarryCarysGhost thinks the latter event will keep Cummins trucking, as "diesel fleets are being replaced" in the U.S.

Under Armour, another clean double, has a few trends of its own to thank, including a retailing rebound at distributors like Foot Locker (NYSE: FL  ) , strong sales growth in most clothing categories it sells, and the introduction of a new line of basketball shoes that has investors hopping with excitement.

All-Star investor brandongasper swears by the company's "football gloves ... A small token of the business, but necessary for the game. ... Under Armour is poised to take a sizable chunk of Nike's (NYSE: NKE  ) market share away."

Truth be told, most investors agree that these stocks are winners. Yet there's one company Fools think can do even better. That's why this week, we'll be passing right over Under Armour and downshifting on Cummins, to focus on...

The bull case for OmniVision Technologies
CAPS member JJBull1 turned bullish on OmniVision last summer, citing the "huge orders from multiple companies like Apple, [Nokia (NYSE: NOK  ) ] and many others." Limited supply vs. demand means big profits for OV, says JJ.

CAPS All-Star benoitlj points out that, in addition to "making the picks and shovels for smart phones," OmniVision also "makes the chips for ... cameras, notebooks, etc, whether they're [Apple] or other companies."

And even that isn't all. tomorbeck tells us OmniVision is selling into the "notebooks, auto, security, medical, entertainment ... plus image sensor market. ... Has potential to be huge in next 1-3 years."

So far, this does sound like a growth story. No wonder the stock has done so well. But after having doubled already, will it keep going up? Or is OmniVision's run done?

Why I don't see a future for OmniVision
Call me a pessimist, but I have to come down on the latter side of the debate this week. At 48 times earnings, but with analysts projecting just 10% long-term annual earnings growth, OmniVision looks "priced for perfection."

Even if every positive prediction made by every Fool on CAPS came to pass, and even if OmniVision grew at several times its projected rate, the stock would still look expensive to me. I say this because from a free cash flow perspective, OmniVision doesn't appear nearly as profitable as its GAAP-reported "net income" suggests. With only $6.4 million in trailing free cash flow to its name, it seems to me that OmniVision's reported earnings are overstating its true cash profitability by a factor of five or more -- resulting in a price-to-free cash flow ratio of more than 250 on the stock.

Time to chime in
When I call OmniVision a "dud" stock, I don't mean to be mean. It's simply that, as good an investment as it has been for early investors, I'm pretty sure OmniVision stock will underperform the market from this point forward.

But that doesn't mean you need to agree with me. Maybe you see something in the numbers at OmniVision which offers more reason for optimism? If so, we'd love to hear from you. Click over to Motley Fool CAPS, and tell me why I'm wrong.)

Under Armour is a Motley Fool Rule Breakers choice. Ford Motor and Nike are Motley Fool Stock Advisor recommendations. Under Armour is a Motley Fool Hidden Gems pick. The Fool owns shares of Under Armour.

Fool contributor Rich Smith does not own (or short) shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 620 out of more than 170,000 members. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


Read/Post Comments (5) | 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 November 29, 2010, at 1:41 PM, baldheadeddork wrote:

    Ford doesn't use Cummins engines. They used to buy from Navistar for their HD pickups, but they moved to an engine of their own design this year. Their passenger car diesels in Europe use engines developed in-house or with a partnership with Peugeot/Citroen.

    Dodge buys its diesel truck engines from Cummins. Although they have a devoted following, by all objective accounts the Cummins engine used by Dodge has fallen way behind Ford and Chevrolet.

    Beyond that, the pickup business is a tiny part of Cummins's business. Their bread and butter is in commercial trucks, which are in a full rebound. Sales of Class 8 trucks are projected to hit 230,000 next year. That's the highest since 2006 and analysts I've read say there's more pent-up demand behind that, thanks to an aging fleet.

    I think Cummins is too expensive to buy in now, but there is a lot of substance behind its run up this year.

  • Report this Comment On November 29, 2010, at 5:22 PM, acrhodes wrote:

    OmniVision Technology is the only provider of BSI technology products. Samsung and Sony both have research devices claiming BSI; however neither have production units. OmniVision's other major competitor, Aptina, continues to struggle with technology advances. Their engineering spend is way too high to have these types of miserable results. They continue to have a relationship with Micron for wafers, which are priced well above market and Micron offers terrible product support for a third rate customer in their portfolio. Samsung is not putting the money or effort behing BSI as the camera market represents 2% of their total revenue and FSI products still dominate the market. As Apple pushes more products to BSI, OmniVision is the only manufacturer that has the ability to supply product.

  • Report this Comment On November 30, 2010, at 1:38 PM, russfischer1013 wrote:

    Actually I would agree that Under Armour looks expensive...but it is up 4% today. Go figure.

    Cummins looks 30% cheap to me. The heavy duty truck fleet is the oldest in history. and they have a joint venture to modify their engines for use with natural gas at about a buck a gallon equivalent.

    Omnivision has converted cash into inventroy and receivables....as would happen during an explosion in sales that is underway as I type. Last quarter had $46 mil in cash flow...7 times what you claimed for all of last year. It would take hours to explain the many other reasons that you are wrong on Omnivision.

    They report earnings today after the close. In about three hours we will see which one of us is "all wet".

  • Report this Comment On November 30, 2010, at 8:25 PM, russfischer1013 wrote:

    Well, Omnivsion beat on earnings and guidance....looks like you are soaking wet and I am dry and comfortable.

    But, thanks for playing.

  • Report this Comment On December 07, 2010, at 8:33 AM, leaderoftheback wrote:

    I sold my OVTI years ago because I could never sort out management; who they are, what they say, what they actually produce...except press releases, which were always plentiful and always made me think the company was on the cutting edge. But technical wizardry never translated to higher (or any) earnings. This meshes with Ditty's suggestion that earnings may not be what they seem. Anybody diving in at this point should be prepared for disappointment.

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