Get Ready for the Fall

"The bigger they are, the harder they fall." It's the worst nightmare of every investor in today's market -- buying a hot stock just before it takes a nosedive.

Every day, Nasdaq.com publishes a list of stocks whose shares have just hit new 52-week highs. And every day, investors read the list and tremble -- some with greed, others with terror. On our Motley Fool CAPS investing community, these top stocks usually enjoy favorable ratings, since everyone loves a winner. But what should you do when some of CAPS' smartest investors pan one of these hot stocks?

For starters, consider using the "52 week high" list as a starting point for further research. Stocks can rise for many reasons, but a little help from Motley Fool CAPS can make it easier to figure out how worthy those reasons are. Let's see what the more than 125,000 stock gurus (and counting) in CAPS have to say about the list's latest contenders:

 

One Year Ago

Recent Price

CAPS Rating

(5 max):

UST (NYSE: UST  )

$53.67

$69.46

***

NCI (Nasdaq: NCIT  )

$16.17

$31.17

***

Cantel Medical  (NYSE: CMN  )

$14.34

$15.33

***

John Hancock Bank and Thrift Opp. Fund

$6.10

$14.10

**

Transmeta  (Nasdaq: TMTA  )

$13.43

$18.21

*

Five stars = highest possible CAPS rating; one star = lowest. Companies are selected from the "NASDAQ 52 Week High" list published on Nasdaq.com on the Saturday following close of trading last week. One year ago and current pricing provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

"Everybody loves a winner"
When stocks soar on the wings of success, bears become rare -- or so I hear. To be honest, we're not seeing much evidence of this in today's list. Three of our 52-week-high-hitters receive only mediocre three-star ratings on CAPS. As for the other two, well, investors seem to think that Transmeta is a dog -- and they're pretty sure John Hancock Bank belongs to the genus canis, as well.

Fortunately, we're not looking for winners in this column. Rather, we're looking to identify losers -- and ideally, to do so before they can cost you a lot of lucre. In that regard, single-starred Transmeta would appear to be our likeliest suspect. So what is it, exactly, that investors don't like about this company?

The bear case against Transmeta
If you don't know the company, well, that's not surprising. With just $26 million in revenue over the past year, this provider of semiconductor intellectual property attracts considerably less attention than its clientele -- but you may have heard of them at least. Intel (Nasdaq: INTC  ) , Advanced Micro Devices (NYSE: AMD  ) , Hewlett-Packard (NYSE: HPQ  ) … ring any bells?

Obscurity hasn't hidden the company from CAPS, however, where nearly 100 investors have cast votes for and against it. CAPS All-Star TSIF has this to say about Transmeta:

Nothing new here, coasting down on licensing fees that while substantial, will not keep the company ahead of it's once dynamic game. $21 per share in the bank and no debt woudld be a nice cushion for a company with only 35 full time employees. ... Ability to generate future cash flow, licensing that depends on volume that is weak right now, and no new "intellectual" property in the pipelline would make it seem that they are winding down shop.

This lack of "new stuff" also spooked spookysquid, who complained early last year: "No new product development, ever increasing managerial benefits," before concluding, "This stock is a stinker."

Poetic, spooky, if hardly an uncommon opinion. Quoth FundamentalGamma a year ago December: "Fundamentals bad, price overvalued!"

Now, all this would ordinarily have me quite worried about the stock. Throw in the fact that the company tends to have negative free cash flow in any given fiscal year, and I'd be pretty well convinced that it's ready to fall -- except for two things:

  • First, there's the $21 per share in cash that TSIF mentioned. You'll no doubt note that $21 is more money than Transmeta's stock currently fetches. It would have to burn its cash really fast in order to make that much of a discount justified.
  • Second -- and here's the real kicker -- some of our CAPS members seem to have not kept up on the company's press and earnings releases. Had they read, say, the Nov. 17, 2008 press release, they would know that Transmeta has agreed to sell itself to privately-held Novafora, Inc. for upwards of a quarter billion dollars, and that this is going to give shareholders somewhere "between $18.70 and $19.00" per share, subject to certain adjustments. (Numbers also above today's share price, I should point out.)

Time to chime in
Now, there's always the possibility that this buyout will fall through. In that event, our Transmeta skeptics' concerns would hold a bit more weight for me. Unless and until that bad news comes to pass, though, I'm going to have to give the stock a pass. Between its bulging bank account and its likely imminent purchase at a premium, I just see no reason for this stock to fall. But, there's also not much reason to buy.

But hey, feel free to disagree. If you see something here that I've missed, click on over to CAPS and tell us about it. 

On Jan. 12, 2009, Fool co-founder David Gardner, Jeff Fischer, and their Motley Fool Pro team will accept new subscribers to their real-money portfolio service. Motley Fool Pro is investing $1 million of the Fool’s own money in long and short positions in a range of securities, including common stocks, put and call options, and exchange-traded funds (ETFs). They also incorporate proprietary CAPS "community intelligence" data into their research. To learn more about Motley Fool Pro and to receive a private invitation to join, simply enter your email address in the box below.

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. 751 out of more than 125,000 members. Intel is a Motley Fool Inside Value recommendation. The Fool owns shares of and covered calls on Intel. The Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (4)

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 January 05, 2009, at 1:18 PM, kenbech wrote:

    this is the mostinane artical that I have seen on the fool. Possibly the worst I have seen anywhere. Transmeta was dead in the year 2000.

  • Report this Comment On January 22, 2009, at 12:51 AM, TSIF wrote:

    I think you are putting too much faith in management, (none of which is earned). Understating the value of the licenses will spark lawsuits and lawyer costs. You're also missing the "liabilities" on the books. While I don't doubt that there is enough crookedness to pull this off....(shareholders fare better under this deal than if they let management kill the company by slow death)....the fine print "Privately held Novafora will pay Transmeta shareholders between $18.70 to $19 a share, depending on Transmeta's future working capital and other adjustments" still leaves some wiggle room on the price...... Getting AMD to relinquish the preferred shares was a help, but was also an example of how much license fees Transmeta could have gotten had the pursued them.

  • Report this Comment On January 22, 2009, at 12:55 AM, TSIF wrote:

    P.S. Wonder why Mr. Riley was willing to sell 700,000 shares in the $17 range??

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