"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. Below I list a few stocks that may have done just that. Stocks that, according to the smart folks at finviz.com, have more than doubled since the beginning of this year, and just might be ripe to fall back to earth.
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Stock
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Recent Price
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CAPS Rating
(out of 5)
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FMC Technologies (NYSE: FTI )
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$48.67
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****
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Nordstrom
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$28.60
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**
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Advanced Micro Devices (NYSE: AMD )
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$4.47
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**
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Green Mountain Coffee (Nasdaq: GMCR )
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$60.37
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*
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Fannie Mae (NYSE: FNM )
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$2.04
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*
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Companies are selected by screening for 100% and higher price appreciation year-to-date on finviz.com. Current pricing provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.
Each of these stocks has enjoyed remarkable gains this year. But if you ask the 140,000 investors (and counting) who occupy the judges' stands on Motley Fool CAPS, it's time to get out while the getting's still good. Four of the five receive marks far below average, and even the best stock on this list -- the stock we'll be profiling today -- falls short of the full five-star treatment.
I've got my own suspicions as to why FMC fails to reach that goal, but before I explain my objections to the stock, let's give the bulls a chance to state their case.
Why bulls love FMC Technologies
CAPS member newbuddha introduced us to FMC back in March as a "[g]ood infrastructure supplier to the oil industry. After the credit crisis, investment in infrastructure and FMC's earnings should move up." Indeed they did. All-Star Bojac3728 got straight to the point in a pitch penned last week: "Great earnings." (Do tell.)
And mrsudbury sees more of the same down the road. In December, this All-Star predicted that "offshore drilling will be required to make up for oil supply shortages in the next decade." That being FMC's stock in trade, you can see why mrsudbury would be bullish.
So why am I bearish on the stock? Even after the beaucoup profit reported last month? Reviewing the news, fellow Fool Toby Shute favorably compared FMC to such oil patch peers as Noble (NYSE: NE ) , National Oilwell Varco (NYSE: NOV ) , and Nabors Industries (NYSE: NBR ) , and argued that the company offers investors "one of the best offshore investment opportunities." Operating margins hit 15% last quarter, and operating profit ran at record levels. Yet even FMC admits that its margins are headed back down. And considering the low quality of its profit even when times were good, that worries me quite a bit.
You see, FMC reported some $351 million in earnings for the past 12 months. But in fact, its free cash flow amounts to only one-third that sum -- $116 million. Nor was this some kind of fluke year. To the contrary, over the last five years, FMC has averaged positive free cash flow of less than $100 million per year -- less than half of its reported "net earnings."
Right now, FMC sells for 17 times trailing earnings, with growth projected at 10.5% annually over the next five years. And maybe you think that price is reasonable -- but if so, chew on this for a moment: At $6 billion in market cap, FMC sells for about 60 times the amount of free cash flow it generated in years of rising oil prices.
Foolish takeaway
Even if FMC is in fact "one of the best offshore investment opportunities," that price looks crazy-expensive. (Then again, if you had told me FMC was going to double off its valuation back in March, I'd probably have said that was nuts, too. But it did.)
Regardless, the market must eventually come to its senses, stop bidding up this dud, and let if fall back to earth. My advice: Make sure you're not still riding the rocket when that happens.
(Disagree? Feel free. If you see a future for FMC, here's your chance to tell us why. Click over to Motley Fool CAPS and sound off.)
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