Are These High-Flying Stocks Headed for a Fall?

If there's something that can keep this market down, it's yet to occur. Bad news can't keep the Dow down for long. Surprises can't stun the S&P. Indexes have been steadily moving higher all year, to the delight of stockholders and the annoyance of perma-bears. Some stocks have been on a rocket, despite little rationale to indicate their long-term viability. It's important to cast a critical eye on any company that seems too good to be true, even though your favorite analysts might be giving it a big thumbs-up.

Getting a little too hot in here
There are few analysts who expect highfliers to turn sour, so my early screen included stocks with positive forward projections, but focused on companies with high P/Es or negative earnings. All of my choices saw big earnings losses this year, and projections call for losses going forward as well. For one stock, there's no profit on the horizon at all. How might these rockets run out of fuel? Let's find out.

Company

Current P/E

1-Year Price Change

Projected 5-Year EPS Growth (annualized)

Forward P/E

Six Flags (NYSE: SIX  ) NM 44.3% 10.0% 52.57
Hot Topic (Nasdaq: HOTT  ) NM 87.1% 20.6% 22.75
Westport Innovations (Nasdaq: WPRT  ) NM 166.3% 28.3% NM

Source: Finviz.com. NM = Not meaningful because of negative earnings.

A wild ride
Six Flags is an interesting case. The amusement park company emerged from bankruptcy in 2010 with lower debt and a better focus, but it's going to take time to improve performance beyond the impact of net operating losses that will goose its bottom line for a while. In the meantime, performance has been flat for years, which points to a resistance to economic headwinds but also speaks to the difficulty of growing income at well-established destinations.

The 5.2% dividend yield is nice, but combining that high payout with an ill-advised stock buyback plan seems like the wrong approach coming out of bankruptcy. Warm weather and improving economic outlooks could help Six Flags, but they're also good news for competitor Cedar Fair (NYSE: FUN  ) , an operator that's both avoided bankruptcy and has been slowly and steadily reducing liabilities for years:

I think both companies have room to run over the long term, but Six Flags' rise looks like the ramp up a steep coaster track, about to take the plunge. Don't hop on this one at the wrong time; wait for it to come back to the station and strap yourself in. My underperform call on this one will only be for a few months.

That store is so '90s
Hot Topic is a company of interest to me for a few reasons. It's been years since I was a high school student myself, but younger siblings have been around to remind me of the company's irreverent -- and often hideous -- garb for some time. Beauty is in the eye of the beholder, and the gloomy economy should have driven kids to this company's outlets for the past few years. But that hasn't happened:

There's little of note that's positive in Hot Topic's long-term performance, and present operations aren't exactly offering much hope either. Fool contributor Sean Williams is as gloomy as a Hot Topic store's interior on its recent moves, dinging store closings, rising inventory levels, and inexplicably raised dividends in spite of continued poor performance. If so much underwhelming performance doesn't convince you, perhaps my CAPScall ode to Hot Topic will. I'm in the red on my call right now, but I don't expect that to last for long.

It's a gas
Westport is a subject of intense debate around Fooldom. On one hand, many are fans of the company's key role in natural gas vehicle conversions. On the other, it's hard to deny that Westport has grown so much that its future profitability (which isn't here yet) may already be baked in. We do have different Foolish opinions, and while I like the idea of transforming our transportation fleets to run on natural gas, Westport's ramp-up to profitability leaves it open to assault on several fronts.

While the company's partnership with Cummins (NYSE: CMI  ) gives it a foot in the door in the trucking industry, Westport's engine conversions have yet to sell 1,000 units per year. Compare that to electric cars, which have broad government support, are being built by multiple automakers, and are already selling in the tens of thousands annually. Westport's scale is so small that it's difficult to award it the nat gas vehicle crown before any vehicle manufacturer makes a concerted push toward mass adoption. Most analysts already feel that Westport's meteoric rise is reaching its apex, and the company is years away from profitability.

Few stocks can keep growing as fast as Westport with no hope of profit. The stock has mocked the bears for years as it's kept making gains. But it's gone a decade without profit or positive free cash flow. By the time the red ink turns black, there may be no more gains left before competition finally gets into the game.

Foolish final thoughts
I think all three stocks are getting ahead of themselves, and I'll be giving them all underperform ratings in Motley Fool CAPS to hold myself accountable to these calls. I hope you agree with me, but if not, I'd love to find out why, so let me know your opinions with a comment. If you're looking for one high-flying stock that still offers a ton of potential, The Motley Fool recently put together a free report on one rule-breaking company that's already a multibagger for our Rule Breakers subscribers. It's not done growing yet, so claim your copy today for everything you need to know. Just click here to find out more.

Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more news and insights. Motley Fool newsletter services have recommended buying shares of Cummins and Westport Innovations. 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.


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  • Report this Comment On March 14, 2012, at 9:24 AM, 2old2fool2 wrote:

    All long hauling trucking companies pass their fuel cost on to the company who has ordered the goods then the cost is passed on to retail buyers of the products. Having said that, a long hauler 18 wheeler carries around 300 gallon of fuel(diesel or gasoline). They say they make about 6 miles per gallon. So they need to refill about every 3 days if they keep that rig moving for a living. So do the math. that is 110 fill up per year. Times 300 gallon per fill up times $3.69 for gasoline or $3.95 for diesel.

    CNG is selling from $1.30 to $1.85 in my area.

    That is over $2.00 per gallon savings, $600 per tank and $66000 per year for 1 trucks usage. I leave it to you to say how many 18 wheelers on the hiways each passing that cost on to us.

    The EPA makes it very costly to get any vehicle qualified to run on CNG or run on both CNG and Gasoline/Diesel fuel because you have to qualify every make/ model, year. WPRT engines are approved and ready for market now. So that is why Ford, GM and Cummings all are working with them to get these engines available in their new mid and heavy duty trucks. WPRT has a long way to go before their market is saturated or peaked. mean while their growth has just began. Everyone thinks the Ipad is a great tool. CNG conversions are even better tools.

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