Rocket Stock or Dud?

"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, WSJ.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. In our Motley Fool CAPS investing community, these top stocks usually enjoy favorable ratings, because 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 130,000 members (and counting) in CAPS have to say about the list's latest contenders:

 

One Year Ago Today

Recent Price

CAPS Rating

(5 max):

Shanda Interactive  (Nasdaq: SNDA  )

$29.26

$42.88

***

3Com  (Nasdaq: COMS  )

$2.38

$3.55

**

Scotts Miracle-Gro  (NYSE: SMG  )

$35.96

$35.97

**

Star Scientific

$1.47

$4.87

*

hhgregg (NYSE: HGG  )

$12.55

$14.68

*

Five stars = highest possible CAPS rating; one star = lowest. Companies are selected from the "New Highs & Lows" lists published on WSJ.com on Thursday last week. Year-ago and current pricing provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

"Everybody loves a winner"
So I hear -- but folks, I'm not seeing the love this week. Fact is, with the sole exception of Fool fave Shanda Interactive -- a Motley Fool Rule Breakers recommendation -- investors are pretty down on this week's 52-week-high hitters. At the bottom of this week's list is a company that I've only recently become acquainted with firsthand: Indianapolis-based retailer hhgregg.

A rare sight on the East Coast where I grew up, this shop dominates the local electronics retailing scene, a fact I discovered upon moving to Indiana. While we've got your usual sprinkling of Wal-Mart Stores (NYSE: WMT  ) , Costco (Nasdaq: COST  ) , and Best Buy (NYSE: BBY  ) out here in Indy, nobody fills the airwaves or blankets the Sunday circulars section quite as completely as hhgregg. But is the company a rising star in the Midwest, or just another flash in the pan?

Fools hash over hhgregg
As is so often the case on CAPS, opinions differ. CAPS All-Star runjm, for example, gave the company a thumbs-up for "[t]aking market share and building new stores." Likewise, fellow All-Star billyhall praised hhgregg's "aggressive (overly aggressive?) growth strategy. If they can provide controlled, intelligent growth while working their current business model, then this stock's a buy."

On the other hand, intllex criticized hhgregg for unspecified "customer service issues" and opined: "This stock should be beaten with a wet noodle, oops it is a wet noodle." Meanwhile, zrs79 was turned off upon seeing "[t]oo many anti-takeover clauses in their prospectus. Which means that they will try to maintain control on the company no matter how crappy they are doing."

Now, most of the pitches that have been penned about hhgregg date from 2007. But do they hold true today? Well, I can attest to the ubiquity of the brand -- in its hometown, at least. Customer service? Seems fine to me -- better than I've received at Best Buy in fact, and miles ahead of the near-complete lack of personalized service at Wal-Mart, Costco, or any of the other big-box purveyors of electronic delight.

Valuation-wise, investors also seem to be selling hhgregg short. The company's 14 P/E compares favorably to the 16 P/E of Best Buy, for example. It compares well, too, to the 18% annual earnings growth that most analysts expect hhgregg to produce over the next five years. Also worth noting -- hhgregg has been achieving strong growth without sacrificing profit margins. The company has been boasting operating margins superior to Best Buy and Costco, but cedes to Wal-Mart.

Time to chime in
Is all of that reason enough to buy hhgregg? Not quite -- not for me, at least. Personally, in addition to the strong GAAP metrics, I am going to need to see stronger free cash flow at the company before I ante up my own hard-earned cash. But this issue isn't big enough for me to side with the bears, either. I simply do not believe hhgregg has enough things going against it to justify selling the stock.

Of course, that's just my opinion. If you disagree -- feel free. In fact, here's your chance to tell us what you think and why: Click on over to Motley Fool CAPS and give us a shout. 

Best Buy, Costco Wholesale, and Wal-Mart Stores are Motley Fool Inside Value selections. Shanda Interactive Entertainment is a Rule Breakers pick. Best Buy and Costco are Stock Advisor recommendations, and the Fool owns shares of each.

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 was recently ranked No. 313 out of more than 130,000 members. The Fool has a disclosure policy.


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