Rocket Stock or Dud?

By Rich Smith (TMF Ditty) | More Articles
September 22, 2009 | Comments (11)

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"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.

Stock	Recent Price	CAPS Rating (out of 5)
Joy Global (Nasdaq: JOYG )	$47.55	*****
Cell Therapeutics (Nasdaq: CTIC )	$1.47	***
Novavax (Nasdaq: NVAX )	$4.96	*
BioCryst Pharmaceuticals (Nasdaq: BCRX )	$9.50	*
Human Genome Sciences (Nasdaq: HGSI )	$19.80	*

Companies are selected by screening for 100% and higher price appreciation year-to-date on finviz.com. Five stars = highest possible CAPS rating; one star = lowest. Current pricing provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

Each of these stocks has reaped huge rewards this year, with the biotech sector in particular enjoying a remarkable resurgence. 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.

Case in point: Of the four biotechs on today's list, most receive marks far below average. Meanwhile, the odd man out this week, Joy Global, although recipient of the full five-star treatment, seems to me unworthy of that honor ...

But before I explain my objections to the stock, let's give the bulls a chance to state their case:

The bull case for Joy Global
CAPS member brice7698007 starts us off with the bull thesis, tongue planted firmly in cheek, calling Joy "an arms dealer of sorts, supplying the tools to the companies that tear up the earth, to satisfy our endlessly voracious appetite for habitat destruction. ... in any case, nicely run business ... & should do nicely going forward. think of all the money you'll make. don't think on all the poor little cuddly squirrels, chipmunk, deer, and three-toed sloths who used to live in the forest that was bulldozed to make your suburban home, and now have no place of their own."

Of course, Joy is more closely associated with the tools used to mine coal than with those used to build skyscrapers from which to defenestrate wildlife. Knowing this, kab1952 points out: "Coal like uranium will be mined and will be hot once this R thing is over with with. Joy is a major player in suppling the machinery & equipment required to mine the coal." Which brings us to our final observation, courtesy of msbob7: "China is using coal like no tomorrow. They are deep in the Industrial Age."

Perhaps that's why Joy Global has done so well this year. In contrast to more diversified manufacturers like Caterpillar (NYSE: CAT ) , players such as Joy Global (and archrival Bucyrus (Nasdaq: BUCY ) ) aim squarely at the mining industry that feeds industry in China and other fast-developing markets. But China's insatiable appetites notwithstanding, the question remains: Now that Joy has already doubled, is there any room for it to rise further?

Short answer: No
Oh, I know what you're thinking. With a stock priced at merely 11 times earnings, and a history of growing its earnings at an astounding 54% per year compounded over the last half-decade, how can Joy Global not be a buy? But the answer is simple: Joy Global has topped out. It's had a great run, true, but it's too expensive today. (Yes, even at a P/E of 11.)

You see, the past growth is great and all, but going forward, analysts today think that Joy will grow at only about an 8% pace. That's too slow to justify an 11 P/E -- and it gets worse.

Turns out, even the bumper crop of profit that Joy is currently, er, enjoying, isn't all it's cracked up to be. Examine the firm's cash flow, and you'll see that in the last four quarters only 81% of this firm's reported "net earnings" under GAAP are backed by actual free cash flow. With free cash so weak, Joy's stock is actually trading for more than 13 times its annual free cash flow. (Incidentally, were this not the case, it's unlikely we'd see Joy's balance sheet loaded down with more than $280 million in net debt.)

Time to chime in
Fools, I take no joy (no pun intended) in nixing this company today. Truth is, this company has done a superb job of rewarding its shareholders in years past. But all good things come to an end, and this company's stock price has simply gotten ahead of its prospects as a business. The time has come to cash out, count your winnings, and find a better prospect.

Or not. Here at Motley Fool CAPS, dissent isn't just welcomed -- it's encouraged. If you've got a theory for why Joy Global remains a buy, here's your chance to tell the world about it. Click over to the site right now, and tell me why I'm wrong.

The Steve Jobs Betrayal
You may already know that in the final year of his life, Jobs revealed a stunning betrayal — and told his biographer, "I will spend my last dying breath... and every penny of Apple's $40 billion in the bank to right this wrong." What was it that made Jobs so irate — and why could it make a few in-the-know investors some major profits over the coming months and years?

Enter your email address below to find out what made Jobs so enraged!

Fool contributor Rich Smith does not own shares of any company named above.You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 704 out of more than 140,000 members. The Fool has a disclosure policy.

Read/Post Comments (11) | Recommend This Article (22)

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Report this Comment On September 22, 2009, at 2:53 PM, jetsgirl2009 wrote:

I really don't know why you are so negative on NVAX. What are your reasons? Because it went up it should go down?
The flu is not hype. It is real. NVAX produces vaccines via cell culture, not chicken eggs. Considering the huge amount of vaccine that must be produced, we would run out of eggs pretty quickly.
We can't predict the magnitude of the spread, but there won't be enough vaccine produced by mid-October if the epidemic is severe.
In addition, NVAX vaccine technology doesn't begin and end with swine flu. Please read up on this company before making snap opinions.
Sometimes, stocks go up because they are deserving. I truly hope you are short.
Report this Comment On September 22, 2009, at 4:18 PM, baltbear wrote:

joyg has benefitted from reality: even in th past year's slump, coal got burned. the chinese have, as a result of their finding out that iso standards are there for a reason, hiot the american mkt looking for quality mfg..for a while.
vaccine stocks have ridden a wave of fud/greed out of touch with reality.
since january the entire "biotech" area has moved up ard under some rumourd expectations about obama.
in some areas it has hone past bubble to froth on the mouth mania.
i have watched on go from "not a going concern" to $160mm mltcap in 5 months of the froth.
http://baltbear-on-finance.com/?p=213
if there is a bottom forming (nobody but politicians would say "recovery" heavy equipment will probably hold steady. reports to me from the field say that within the usa heavy equipment usage, transportation and replacement are in worse shape than last fall. my guess isd that this will change in "proper time" for the primaries in spring.
Report this Comment On September 22, 2009, at 4:40 PM, poconobear wrote:

i really dont think u should compare 4 bio tech stocks with joyg. they r a whole different animal. each has its own querky upside potential, be it a buyout, its pipeline, or a good spec. makes the game interesting!
Report this Comment On September 23, 2009, at 7:07 AM, clawmann wrote:

Within the next few weeks, BCRX will very likely get a stockpile contract from HHS for its new intravenous antiviral, peramivir, which has completed Phase II's in the US and Phase II's in Japan.
And HHS just gave Biocryst $77.2 to fund the US Phase III trials.
There is NO, I repeat, NO intravenous antiviral approved for use anywhere in the world. Tamiflu is an oral, and Relenza is inhaled. Peramivir is the only one that is even close to final approval.
Now, back to the HHS stockpile contract that is likely in the next few weeks, maybe even next week. If that contract is awarded, the HHS will also need to issue an emergency use authorization for its use. That will be a key event of extraordinary significance. It will enable ICU doctors to use peramivir to treat those seriously ill with the flu (H1N1 or seasonal); and it should be remembered that many of those patients will be unable to inhale Relenza or take a sufficient amount of oral Tamiflu to tackle the problem. Intravenous administration of an antiviral is cleraly the preferred method, just as intravenous administration of antibiotics is the highly preferred method of treating severe bacterial infections.
Although the proposed contract with HHS will only cover a small amount of peramivir (1,000 - 40,000 courses, not doses, courses), it is specifically mentioned in the rfp that was sent to Biocryst with resepct to the propsoed contract that HHS may unilaterally raise that ceiling. Furthermore, the issuance of an EUA by HHS will in fact send a signal to many foreign regulators, many of which rely entirely on the approvals issued by the FDA or the EU. Foreign orders in the six months following the EUA could be quite significant.
Biocryst has been bashed to smitherines so much by The Street and others that people have just gotten into the habit and have lost their ability to asess this invetsment objectively. Evidence? When the HHS gave Biocryst $77.2 million to fund Phase III's the stock dropped. Why? Because everyone was focused on proposed stockpile contract and were disappointed when the INITIAL size of that contract was way below some inflated expecatations. Just the $77.2 million provided by the HHS to fund the Phase III's should have triggered a substantial upside movement.
Biocryst has sufficient funds right now to get them through the endof 2010. No dilution in sight. Add to that some stockpile orders from HHS and foreign governments and we are looking well into 2011 beyond the projected FDA approval date.
Disclosure: Very long BCRX (and for good reason)
Report this Comment On September 23, 2009, at 7:10 AM, clawmann wrote:

Correction to first sentence: should read "Phase III''s in Japan", not "Phase II's".
Report this Comment On September 23, 2009, at 9:25 AM, southernbeachguy wrote:

CTIC's rise was because they were approved for sell in Europe and have sucessfully shown to extend life in Clinical Cancer trials in the U.S. I would think that to be a good reason for the PPS to go up. They also have other Drugs coming out.
Report this Comment On September 23, 2009, at 4:22 PM, AlexKalman wrote:

clawmann,
You are wrong there is exactly one AntiViral intravenous medication in the world, approved for use in Russia.
The medication is called NOV-205 in the USA and is in the early FDA Phase II studies.
NOV-205 works great too and it is ashame that americans can not benefit from this medication but a third world country like Russia has doctors that save lives with medications like NOV-002 and NOV-205.
http://en.wikipedia.org/wiki/NOV-205
This company is called Novelos Therapeutics.
NOV-002 is in Phase III FDA Fast Track Special Protocol Assessment for their adjunct chemotherapy cancer medication called NOV-002.
The study has been extended 3 times due to survival, it appears the patients tested fail to die.
And guess what?
Nobody ever heard of Novelos Therapeutics NVLT or their pipeline.
Buy at your own Risk and do your own Due Diligence
Report this Comment On September 24, 2009, at 9:06 AM, clawmann wrote:

AlexKalman: OK, I stand corrected. But at this point, according to the info you posted, it will be some time before NOV-002 will be ready for world wide acceptance. Biocryst's permaivir has completed Phase II's in the US and Phase III's in Japan. And, as I wrote, HHS just gave BRCX 77 million to fund Phase III's in the US for peramvir.
Even IV relenza and IV tamiflu are far behind peramivir as far as achieving FDA approval are concerned.
Report this Comment On September 24, 2009, at 9:23 AM, clawmann wrote:

Corrrection in the above post I meant to refer to NOV-205, not to NOV-002.
And Axel, you failed to mention that, even in Russia, NOV-205 (Molixan) has only been approved for treatment of liver diseases (including hepatitis C), not for influenza.
So I assume the Phase II's currently being conducted in the US are devoted to proving efficacy and safety related to the treatment of hepatitis C.
If Novelus wants it approved for influenza, that would require starting with appropritaley designed Phase I's in the US.
Report this Comment On October 03, 2009, at 5:25 PM, AlexKalman wrote:

Now Harvard and MassGeneral are interested in Novelos' Glutathione Pathway for radiation illness.
In addition to their molecules ability to kill cancer and virual medications Novelos just received a million $ grant from the US government.
Plus they are on FDA Phase III fast track SPA for adjunct chemotherapy.
Appears that FDA approval has been slowed down because the test patients are failing to die from their cancer.
http://finance.yahoo.com/news/Novelos-Therapeutics-bw-209021...
Invest at your own Risk and DD!
Report this Comment On October 03, 2009, at 5:27 PM, AlexKalman wrote:

Now Harvard and MassGeneral are interested in Novelos' Glutathione Pathway for radiation illness.
In addition to their molecules ability to kill cancer and virual medications Novelos just received a million $ grant from the US government.
Plus they are on FDA Phase III fast track SPA for adjunct chemotherapy.
Appears that FDA approval has been slowed down because the test patients are failing to die from their cancer.
http://finance.yahoo.com/news/Novelos-Therapeutics-bw-209021...
Invest at your own Risk and DD!

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