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, MSN Money 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 110,000 stock gurus (and counting) in CAPS have to say about the list's latest contenders:

Five stars = highest possible CAPS rating; one star = lowest. Companies are selected from the "New 52-Week Highs" list published on MSN Money on the Saturday following close of trading last week. One year ago and recent prices 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. So it's little surprise to find this week's list largely inhabited by five-star stocks. What is surprising is the one subpar two-star that's snuck in.

Long time, no see
Ariba. Now there's a blast from the past. I remember back in the heady days of the Dot-Com Bubble, when Ariba was dueling CommerceOne to become "the next big thing" in e-commerce: Business-to-business sales. B2B. (Remember when it was cool to refer to things as letter-2-letter?)

CommerceOne may be long gone, but evidently -- though I hadn't thought of Ariba in years -- this one's still hanging around. And now it seems that Ariba is back in vogue on the Street, if not among Fools. Let's find out why CAPS members are still mocking Ariba years after it ceased to be funny.

The bear case against Ariba
pranilbalram plays straight man for us, apparently taking the company seriously enough to pose a rational bear case: "Given the current market conditions, companies will not spend resources on respective firms' product and services but rather, companies will find ways of cutting costs in order to preserve their resources until economic conditions get better."

burgerandsoda, in contrast, has no patience with Ariba, writing in May: "This is all you get from Ariba every quarter....'Excluding a $3.9 million charge for amortization of intangible assets and an $8.4 million charge for stock-based compensation, Ariba said it earned 10 cents per share in the recent quarter.'" Ah, yes. Pro forma accounting -- well, that was part of the environment Ariba grew up in, wasn't it?

So were runaway stock-option dilution and insider share sales, apparently. Reviewing Ariba a few months back, Hassjo summed up the company up in two words: "Insider selling."

Reviewing Ariba's numbers, I think I see what got Wall Street's attention. Ariba's not the total basket case that it once was. Revenue is stable, and the company has found itself several marquee clients -- Citigroup (NYSE:C), Manitowoc (NYSE:MTW), National City (NYSE:NCC), and MSC Direct (NYSE:MSM). For another, it's finally generating positive cash flow -- just not nearly enough of it to justify the company's $1.4 billion market cap.

On balance, I think the negatives here vastly outweigh the positives. On the subject of insider sales, they're constant and large in scale; but I don't see an open-market purchase of Ariba stock by insiders. And burgerandsoda is right on the (lack of) money when criticizing Ariba's definition of "profits." Over more than a decade in business, Ariba has reported positive quarterly earnings from operations exactly three times -- all of them five years ago. Even the ballyhooed earnings report that sent Ariba's stock flying a couple weeks ago showed reported operating losses ballooning 35% year over year.

No, Fools. History's verdict on the twin yo-yos of B2B is in, and history got it right the first time. Ariba's up today, but it's going right back down.

Time to chime in
Of course, the aim of this column isn't just to tell you what I think about Ariba -- or even what other CAPS members are saying. We really want to hear your thoughts. Click on over to Motley Fool CAPS and tell us what you think.

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