Which Stock Falls First?

"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.

Every day, finviz.com publishes a list of stocks whose shares have just hit new 52-week highs. Every day, investors read the list and tremble -- some with greed, others with terror. Within our Motley Fool CAPS investing community, these top stocks generally enjoy favorable ratings, since everyone loves a winner… but not always:

Companies selected by screening for new 52-week highs hit on the Thursday before publication. Low and recent price provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

When a stock hits a new 52-week high, it's only natural to wonder whether "this time" is "the last time" -- whether there's nowhere left to go, but down? And really, because no company is perfect, there's always a chance that will happen.

Fact is, if you look hard enough, you can find a flaw in any stock. For example …

• sanofi-aventis, while arguably cheap at barely 12 times earnings, saw its profits fall steeply in the most recent quarter, and is expected to show negative earnings growth over the next five years.
• PepsiCo, in contrast, is growing, but its 8% long-term growth rate may not be fast enough to justify the stock's 17 P/E ratio.
• Kraft is growing faster than Pepsi, and costs less, but carries much more debt ($26 billion, net of cash on its balance sheet).
• While Altria … [insert antitobacco diatribe here].

And yet, Fools on balance still find more positives than negatives at these companies, each of which enjoys an above-average four- or five-star rating on CAPS. As it turns out, the only stock making today's list that fails to win support from Foolish investors is Youku.com,

Youku.com
Less than six months after rushing onto the stage as a public company, Youku.com has proven an unstoppable force on the markets. The company that CAPS member HGpm calls the YouTube of China hit an all-time high Thursday, and even after falling back briefly Friday, still sells for more than 110 times annual revenue -- a price that All-Star investor tsperbeck deems as "way overvalued." After all, as CAPS member waynehe points out, "Youku has many competitors. Besides, contents are copied freely among these competing sites." So why has the stock performed so strongly?

The answer lies in part with its competitors. Last week, Jefferies & Co. upgraded Youku rival Baidu.com (Nasdaq: BIDU), pointing out how early China still is in the "dot-com growth cycle," and predicting great things for China's leading search engine. If that's true for China's version of Google, why shouldn't it be true of China's YouTube as well? The parallels here are pretty striking. When Google bought YouTube in 2006, it paid more than 100 times revenue -- pretty darn close to Youku's current 114 P/S.

The main problem with this "history repeats itself" thesis, as fellow Fool Rick Munarriz pointed out earlier this year, is that "giant dot-com portals Baidu and SINA (Nasdaq: SINA) are also dabbling in this space now, and they have the profitability and rich balance sheets to make stronger runs at Youku once its niche is fiscally attractive."

Time to chime in
The real key here is that Baidu and SINA (and Google) are all profitable operations. Youku is not even close. It lost money last year. Analysts expect it to lose more money this year, and even more money next year. While long-term growth estimates continue to call for 50% annualized profits growth over the next five years, I have to point out that 150% of nothing is still nothing.

Suffice it to say, I won't be buying into Youku anytime soon -- but what's your read on the company? If we look far enough down the road, will Youku become profitable some day? Or might Baidu "pull a Google" and save Youku shareholders from their folly, and buy the company early? Click over to Motley Fool CAPS now, and tell us what you think.