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.

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.

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 enjoyed remarkable gains this year. 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. Four of the five receive marks far below average, and just one stock on this list -- the stock we'll be profiling today -- gets the full five-star treatment.

But I've got my own suspicions as to why Atlas Energy might blow up on investors; before I explain my objections to the stock, let's give the bulls a chance to state their case:

The bull case for Atlas Energy Resources 
Two months ago CAPS member bobutrup called Atlas "[o]ne of the best shale drillers around. Shift toward nat gas in the near future, away from other dirtier carbon fuels will always help." jdiazmunoz agrees: "The drive toward clean energy consumption will drive sales of this efficient natural gas producer, while gas prices will likely increase from their current depressed levels as economic recovery takes hold."

In April, CAPS All-Star kkotwani predicted that over the "next 10 to 15 years focus will shift from oil to natural gas. Mainly because available in plenty in North America," which is a "Top priority in Obama's to do list till we come up with complete renewable solution. After exhaustive search on Natural Gas stocks, this is the only one which caught my attention." kkotwani was especially impressed with the firm's "strong growth in sales (36%) and income (15%), even during worst times of economy where most of companies are showing losses."

OK, so we've got a strong macro thesis underlying Atlas shares. But what about the valuation? Now that the stock's already doubled since the start of the year, is there any room for it to rise further?

Short answer: No
Here's why not. At last report, Atlas boasted roughly 991 billion cubic feet of proven natural gas reserves. Incidental to its flagship gas business, the firm also has about 1.7 million barrels of proven oil reserves -- equivalent to about 10.2 billion cubic feet if converted at the standard industry metric. So call it 1 trillion cubic feet-equivalent.

Now traditionally, natural gas is priced in terms not of "cubic feet," but of the BTUs produced by burning these "cubic feet" -- roughly 1030 BTUs per foot cubed -- and right now, the spot price on these BTUs is $2.25 per million BTUs. So the value on these reserves works out to $2.3 billion (1 trillion cubic feet times 1030, divided by 1 million, times $2.25).

Meanwhile, Atlas itself carries an enterprise value of just $2.5 billion. Compare AtlasAtlas to a rival like Chesapeake Energy (NYSE:CHK), which has 12 trillion cubic feet of gas and equivalent oil reserves, and you'll find a similar disconnect -- Chesapeake's reserves are "worth" $27.8 billion; the enterprise values comes in at $27.7 billion. Where's the margin of safety?

Sure, the overvaluation evident in natural gas stocks makes even the crazy price-to-net asset ratio of a nat-gas ETF like United Natural Gas (NYSE:UNG) look better. But "less overpriced" ain't the same thing as "cheap," folks.

Foolish takeaway
Across the nat-gas industry, companies are selling for prices significantly higher than their worth. Now, maybe this portends a surge in prices in the near future, maybe not. I'm no commodities expert -- which is why I don't buy the stocks, myself. I know my limitations.

But one thing I'm certain of: Natural gas prices had better rise, and quick. Because right now, investors are taking a price rise for granted. If it doesn't happen, there's bound to be some pain coming investors' way.

Disagree? Feel free. Click on over to Motley Fool CAPS and sound off.