Get Ready for the Fall?

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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.

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. On our Motley Fool CAPS investing community, these top stocks usually enjoy favorable ratings, since everyone loves a winner.

Company	52-Week Low	Recent Price	CAPS Rating (out of 5):
Diageo  (NYSE: DEO)	$40.93	$65.02	*****
Novartis (NYSE: NVS)	$33.34	$51.95	*****
Insituform (Nasdaq: INSU)	$11.02	$21.20	****
Linn Energy (Nasdaq: LINE)	$10.81	$24.50	****
Bare Escentuals	$2.45	$12.63	***

Companies are selected from the "New Highs & Lows" lists published on WSJ.com on Friday last week. 52-week low and recent price provided by Yahoo! Finance.

Everybody loves a winner
When stocks soar on the wings of success, bears become rare -- especially in a market like this one. So it's no surprise that most of the stocks on today's list earn an above-average rating from CAPS investors. The trick is going to be choosing which of our winners has the best chance of going on to further glory.

Diageo and Novartis have their pluses, I'll readily admit. But at $40 billion and nearly $120 billion in market cap, respectively, I submit to you that their best days of growth are already behind them. Not so with tiny Insituform, however.

If you've never heard of Insituform, well, I cannot fault you. The maker of the iTAP pipeline repair robot isn't nearly the household name as that other "i"-company. (You know who I'm talking about.) Then again, once upon a time, neither was Intuitive Surgical (Nasdaq: ISRG) -- now one of the biggest names in robots. But judging from its high rating among CAPS members (four stars), Insituform may not remain inconspicuous much longer. Let's find out why.

The bull case for Insituform

• CAPS All-Star hondo928 first noticed Insituform earlier this year, on the occasion of the company's big stock offering. But while others were focusing on the offering's dilutive aspects, hondo928 was more interested in how the share issuance could "give them significant amount of cash to operate, and keep a strong balance sheet."
• In contrast, fellow All-Star nickbaes had already been following Insituform for two years when the stock offering rolled around. Why? This member was intrigued by the company's focus on "rehabilitation of sewers, pipelines, and other conduits [using] a custom-manufactured tube, or liner, made of a synthetic fiber; Pipebursting, a trenchless method for replacing deteriorated or undersized pipelines; and Microtunneling, also a trenchless method of drilling a new tunnel from surface operated equipment; and Sliplining, a method used to push or pull a new pipeline into an old one."
• What it all adds up to, explains richardrogers4, is a "water play" calculated to profit from rebuilding the nation's rickety underground infrastructure.

It's not an uncommon sentiment these days. As I described last week, water regulator Flowserve (NYSE: FLS) has more than doubled already this year. The stock of General Electric (NYSE: GE) -- a major player in the water market -- hasn't fared so well, but then again, GE has other problems. But can tiny Insituform play alongside these heavy hitters?

So far, the evidence suggests it can. Now selling for a P/E just short of 26, the stock might be a bit expensive. Taking that P/E as gospel, however, might be a mistake.

You see, over the past 12 months, Insituform has amassed only a little more than $24 million in net profit, as GAAP accounting rules calculate the number. Drill down into the cash flow statements to find actual free cash flow, though, and you'll discover that it has amounted to more than $39 million -- half again as much as the company reported as "earnings" over the past 12 months. So perhaps the best way of looking at this company is that it's selling for about 21 times annual free cash flow and, in the opinion of analysts, likely to grow profit at close to 17% per year for the next five years.

Time to fall?
That may not sound like a screaming bargain to you (it doesn't to me). But neither does Insituform's valuation look overly stretched. And in fact, if you remember that the analysts underestimated Insituform's profits twice in the past four quarters, you might even be looking to bet that the company will grow faster than 17% a year -- making the valuation look even better.

Or not. What we really want to know is what you think about Insituform. Got an opinion? We've got a place to share it.

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