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Get Ready for the Fall

By Rich Smith - Updated Apr 5, 2017 at 7:53PM

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The bigger they are, the harder they (might) 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, 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

Recent Price

CAPS Rating

(5 max):

American Capital Agency

$19.35*

$21.60

***

CH Energy

$44.52

$48.11

**

Nationwide Financial

$44.53

$52.10

**

Optimer Pharmaceuticals (NASDAQ:OPTR)

$6.98

$10.98

*

Alaska Air Group  (NYSE:ALK)

$25.09

$28.56

*

Five stars = highest possible CAPS rating; one star = lowest. Companies are selected from the "New Highs & Lows" lists published on WSJ.com on Wednesday or Friday of last week. One year ago and recent prices provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.
*American Capital Agency IPOed at $20 on May 14, 2008.

"Everybody loves a winner"
When stocks soar on the wings of success, bears become rare -- or so I hear, but to be honest, we're not seeing much evidence of this truism in this today's list. The top-ranked, 52-week-high-hitting stock gets only a mediocre three-star rating on CAPS. What's more, it isn't even technically a "52-week-high-hitter" at all -- American Capital has been public for barely eight months.

Meanwhile, at the other end of the scale, we have two stocks receiving the CAPS booby prize of a single, solitary star. Optimer, despite its low rating, has almost no bearish pitches. Alaska Air does. So I guess this week we'll be laying out for you ...

The bear case against Alaska Air Group

  • fchild keeps the bear thesis short and sweet. Writing in May: "oil's too pricey. shorting airlines for summer (a gallon of gas will be $5 by the end of summer)." Of course, fchild penned that pitch at a time when a barrel of petrol was going for upwards of $130. Meanwhile, the last time I filled up the tank, gas was selling for closer to $1.50 a gallon. Seems the "oil is expensive" thesis is lying as lifeless as a bearskin rug in front of the fire. Anyone else want to take a stab at it?
  • You there, for example, MrMighty? You had something you wanted to say back in September 2007: "Primarily shorting this because I have a bearish outlook on airlines in general. No matter how well-run they are, the economics of the industry are dismal." Now there's a sentiment even Warren Buffett would agree with.
  • And piling on, we find RockMoxie panning Alaska Air in particular with: "pshaw, like anyone can fly planes in a place that has ice everywhere." (Well, actually, they can.)

In sum, our anti-Alaska Air pitchers say we're looking at a company subject to the whims of erratic oil prices, operating in a dismal industry and an icy environment. And while that last point may seem like a cheap shot, you only have to think back a couple of years to recall the damage that a couple of freak ice storms in places that aren't used to them (Atlanta and elsewhere) or prepared for them can do to the income statements of airlines like Delta (NYSE:DAL) and JetBlue (NASDAQ:JBLU). (Word to the Foolish: Don't forget to factor Mother Nature into your investing.)

Another thing you might want to factor in: Profits, or rather, their absence at Alaska Air. After a brief respite last year, the company's once again losing money. I'd also point out that this airline hasn't generated a penny of free cash flow since the end of 2004, even as rivals Continental (NYSE:CAL), AMR Corp (NYSE:AMR), and UAL Corp (NASDAQ:UAUA) have been making real progress in this regard. Note, however, that all four companies are free-cash-flow negative over the past four quarters.

Time to chime in
Personally, I like to invest in companies that make money. But maybe that's just me -- or maybe I'm too pessimistic in thinking that Alaska Air is never going to be one of those companies. If that's so, then please set me straight. Click on over to Motley Fool CAPS and tell us why Alaska Air is going to shoot the moon.

Motley Fool CAPS : It's fun, it's free, and it just might make you famous.

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. 559 out of more than 125,000 members.

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Stocks Mentioned

Alaska Air Group, Inc. Stock Quote
Alaska Air Group, Inc.
ALK
$47.34 (2.40%) $1.11
JetBlue Airways Corporation Stock Quote
JetBlue Airways Corporation
JBLU
$9.14 (2.12%) $0.19
Delta Air Lines, Inc. Stock Quote
Delta Air Lines, Inc.
DAL
$34.50 (1.59%) $0.54

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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