"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:
CAPS Rating (out of 5):
|OmniVision Technologies (Nasdaq: OVTI )
|Under Armour (NYSE: UA )
|Cummins (NYSE: CMI )
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.)