"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, 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. 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 Today

Recent Price

CAPS Rating

(5 max):

Nippon Telegraph & Telephone (NYSE:NTT) 

$24.17

$26.59

****

California Water Service  (NYSE:CWT)

$39.32

$45.22

***

Maxygen (NASDAQ:MAXY)

$8.41

$8.95

*

Five stars are the highest possible CAPS rating; one star is the lowest. Companies are selected from the "New Highs & Lows" lists published on WSJ.com on Thursday and Friday 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. Even in a market like this one, I'm unsurprised to see NTT inspiring loyalty among their fans. But what's up with Maxygen? This $9 stock has nearly $6 per share in net cash -- surely that fact alone merits at least the same three-star rating as California Water receives. Or does it?

The bear case against Maxygen

  • CAPS member Dublin063 introduced us to Maxygen in June as: "A biotechnology company committed to the discovery and development of improved next-generation protein pharmaceuticals for the treatment of disease and serious medical conditions." Which is a good start, except that it leaves out a lot of other positive points in Maxygen's favor. Such as its stability that comes with GlaxoSmithKline (NYSE:GSK) being its largest shareholder, its history of partnerships with the likes of InterMune (NASDAQ:ITMN) and Nektar Therapeutics (NASDAQ:NKTR). Or the fact that Amgen (NASDAQ:AMGN) at one point thought one of Maxygen's spin-offs good enough to buy it whole.
  • Looking closer at Maxygen, though, at least two of our CAPS All-Stars came away unimpressed. zzlangerhans commented last month that: "Despite having a decent cash position the company has decided to defer further development of Maxy-G34 until a partner is found to fund it. Given that this is their only program in clinical development, it's difficult to see where things go from here. I know that Neose's GCSF analogue didn't attract a partner and that stock is trading in pennies."

As for me ... to be honest, folks, I'm about as bad a pharma investor as you're likely to find anywhere. I don't grok the science; I can't fathom the valuations.

What I can tell you is this: Maxygen has a boatload of cash on its balance sheet, true. But much of this cash arrived in the form of a single transaction, when Maxygen sold certain assets and technology rights to Bayer HealthCare for $90 million last quarter. Such exceptional one time-cash infusions aside, though, Maxygen looks a lot like other small biotechs in that its primary purpose in life appears to be burning cash as it attempts to bring drugs to market.

And yet ...
General rule: Maxygen burns through about $30 million, plus-or-minus $10 million, in cash every year. At the rate it's going, the firm's got a minimum of five years' worth of cash laid away to keep it going as it seeks the world's next wonder drug. While I'm no more a clairvoyant than I am a biotech investor, it seems likely to me that with a half-decade of funds to work with, there's no reason to doubt that Maxygen will be able to develop and sell enough drugs to enough partners to keep itself in business for many years to come. And therefore -- no reason to believe that this stock is destined to fall.

Time to chime in
That said, like I said, I'm no expert in the field. In contrast, maybe you are. If you've got insight into Maxygen's business, then perhaps you will take a moment to share your thoughts about Maxygen?

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. 895 out of more than 120,000 members.

GlaxoSmithKline and California Water Service Group are Motley Fool Income Investor picks. InterMune is a Motley Fool Rule Breakers recommendation. The Motley Fool has a disclosure policy.