Think Twice About Investing in These 5 Hot Stocks

It's been a great year to be a shareholder in poorly rated, highly volatile stocks. In my opinion, that means the time is ripe to get out of said investments -- or at least think twice before putting new money into them. If any of the five stocks I'm highlighting below are on your watchlist, I suggest investing with eyes wide open, and a thorough understanding of the risks involved.

Here's a look at my candidates, what they do, and how far they've climbed in 2012. And if super-growth investing is your game, I'll finish up by offering access to a stock that we believe is the next great American growth story.

Company

Industry

Return (YTD)

DryShips (Nasdaq: DRYS  ) Shipping 55%
National Bank of Greece (NYSE: NBG  ) Finance 98%
Affymax (Nasdaq: AFFY  ) Pharmaceuticals 64%
Zynga (Nasdaq: ZNGA  ) Social Gaming 42%
Corinthian Colleges (Nasdaq: COCO  ) For-Profit Education 130%

Source: Fool.com. YTD = year to date.

Greece rising?
The first two stocks on my list come from the epicenter of the European debt crisis. I'll admit that when it comes to DryShips, I've done some poor analysis in the past. I called the stock a "perfect short" in August, and failed to appreciate the fact that the company could be a serious bargain based on its drilling interests through spinoff Ocean Rig.

That being said, the stock is up almost 70% in just the last eight trading days. I wouldn't short the stock, as it could come out of its current situation a winner, but there are three big red flags that worry me. First, I'm not a huge fan of management at the company. CEO George Economou has already let it be known that he thinks Americans are the dumbest investors around. Second, the stock's immediate future is likely tied -- fairly or not -- to the constantly shifting winds in Greece. And finally, DryShips is carrying a massive amount of debt -- $4.5 billion at last count -- versus just $400 million in cash on hand.

The National Bank of Greece, on the other hand, has had an even more meteoric rise -- climbing almost 120% since Jan. 10. That's great news for investors, but they need to consider what they're investing in: a financial institution that gives out loans to a government that can't honor its obligations, and a people that have a terrible record of fiscal responsibility.

Does the market know something I don't?
When it comes to pharmaceutical companies, large jumps in share price are commonplace, as the golden touch of an FDA approval usually sends shares skyrocketing. But in the case of Affymax, which develops products to treat serious cases of anemia, the recent 64% hike in its shares didn't come on the approval of a new drug. In fact, the only news I could find associated with the company is the promotion of Cynthia Smith to vice president of market access and commercial development. Either the market knows something I don't, or it's acting very irrationally.

And speaking of acting irrationally, how about Corinthian Colleges' 130% spike since the new year? I understand that earnings came in better than expected, but consider that the report still revealed a 14% decline in revenue, a 10% drop in enrollment, and an 82% drop in adjusted earnings per share. Though I've softened my stance on for-profit education, my research tells me that Corinthian is the worst of the bunch.

The Facebook effect
Finally, we have Zynga, the social-gaming company that benefited the most from Facebook's IPO filing. While the numbers revealed in that filing have impressed some investors, our very own Tim Beyers is unconvinced. He believes Zynga to be a faker -- primarily because it lacks innovation, often copying others' gaming efforts -- with unsustainable competitive advantages and a lack of truly excellent management. I'm with Tim on this one; you'd better be sure you know what you're getting into before putting your money here.

Where the great growth stories truly are
But don't worry, I'm not here just to be pessimistic. I believe there are plenty of great growth stories out there. Our highly acclaimed Rule Breakers newsletter has put together a special free report -- Discover the Next Rule-Breaking Multibagger -- that highlights what it thinks is the best opportunity out there right now. To find out which company that is, get your copy of the report today, absolutely free!

Fool contributor Brian Stoffel has no positions in any of the companies mentioned. You can follow him on Twitter at @TMFStoffel. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (9)

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 February 14, 2012, at 2:19 PM, steveat wrote:

    First of all, I agree with the fact that DRYS and NBG are to be approached with caution. I think many people have the notion that it can't get any worse than it already is. This is completely wrong. WHEN Greece defaults (sorry, but it will). Those 2 stocks will plunge faster than Santa can jump down a chimney.

    There will be peaks and troughs all throughout the year for everyone, but the trough has not ben dug yet for those two. Hold out till the Greece matter is dealt with.

    As far as Zynga is concerned. They are responsible for a decent % of FB's revenues, PLUS striking deals with Hasbro, getting into gambling AND working out a deal with FB to gain more users.

    No innovation? Look, Zynga started if I remember correctly as a company specializing in pop under and pop up adverts...then they got on a roll with Facebook. What I am trying to say is that 1. They found their niche and 2. How much innovation do you want without losing focus? They are still a pretty new company, already showing signs of diversifying and looking at alternative forms of income. FYI Gambling != Casual Gaming. Now they are getting into board games AND Mobile technology. Look for Zynga to work out a deal with a national telco...I can go on and on. I already can see this company take shape, but then again, I understand this industry very well.

    Just like Facebook, this is only the beginning of possibly streams of new income/rev.

  • Report this Comment On February 14, 2012, at 4:23 PM, TMFCheesehead wrote:

    @steveat-

    I totally respect your thoughts, and reserve the right to be proven wrong! We'll have to come back in a few years to see who was right.

    Brian Stoffel

  • Report this Comment On February 15, 2012, at 4:57 PM, jaguarStype wrote:

    -----I might be wrong but I think that if uU check , u'll find that an advisory committee to the FDA made a recommendation to the FDA that they approve an anti-anemia drug developed by AFFY on or about December 7th.. hence the very sharp increase in price... James E Holle

  • Report this Comment On February 27, 2012, at 8:14 AM, no40wonk wrote:

    I am long AFFY and therefore follow it.

    jaguar is not mistaken.

    See the following from this very web site:

    http://www.fool.com/investing/general/2011/12/09/whoa-what-j...

    The link above contains a mixup of company names and symbols regarding AFFY which in and fo itself is pretty awful. That link is, in fact, about three clicks away on yahoo finance news for AFFY and yet our reporter was unable to find much news. It appears he did not look very hard.

    AFFY has no/negative earnings prior to approval of their main product. Approval would mean earnings and a high-teens P/E. There was a major step towards that approval in December.

    That's the story.

    Instead, there is a headline for news on the company that says "Think Twice". In this case the fool is truly foolish.

    The article starts with bemoaning volatile stocks. Maybe irresponsible articles like this one are a contributing factor. Also, the disclaimer says that we fools don't have the same opinions. One is entitled to their own opinions but not their own facts.

    I won't be believing what I read here.

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