Get Ready for the Fall

"The bigger they are, the harder they fall." That'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:

Five stars = highest possible CAPS rating; one star = lowest. Companies are selected from the "New Highs & Lows" lists published on WSJ.com on the Saturday following close of trading last week. Year-ago and current pricing provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

"Everybody loves a winner"
When stocks soar on the wings of success, bears are supposed to become rare. But that's not at all the way things are working out this week. Not a single stock on today's list of 52-week high-flyers gets an above-average rating from CAPS members. The best we see are a couple of mediocre three-star ratings for Vertex and Puget Energy.

Fortunately, in this column, we're not looking for winners at all -- we're after high-flying stocks poised to get their wings clipped, and we've got three candidates to choose from this week. Whom do we choose? How about our old friend AutoZone? Let's see what's got Fools feeling bearish on this one.

The bear case against AutoZone
midas784 warned:

Oil will go through the roof once again and will kill the US Auto sector. People will go back to basics, drive less, live closer to work, use public transportation. That should have a severe impact on car sales, car needs and indirectly on Auto parts. Plus how can you ignore the massive debt (2 billion) and a huge 2 billions in accounts payable. Sooner or later they will have a huge inventory markdown and will be forced to take on more debt to pay its supplier.

Actually, not everyone is ignoring it. CAPS All-Star OldEnglish, for example, makes it the center-point of his bearish thesis: "37 Debt to equity? Rising accounts receivable? Book value of $1? Is this some kind of joke? Get out now!"

Last but not least, at the end of last year, fellow All-Star BSHumphreyII started off with a concession:

The sector story-more people fixing and maintaining their own cars in this economy rather than using mechanics or buying new ones-is a good one. However, this story seems to have sucked in a few too many buyers. ... While P/E multiple over 12 isn't out of the ordinary for this sector, I'd be leery of paying that for a retailer with this much debt in a market with this much competition.

The Foolish cross-examination
Kudos to BSHumphreyII for at least taking the time to set up a straw man before trying to knock it down. But personally, I'm not sure this ol' scarecrow will go down without a fight. Right now, everyone from Ford (NYSE:F) and General Motors (NYSE:GM) to Honda (NYSE:HMC) and Toyota (NYSE:TM) is busy cutting new car production -- and the implications are clear. Fewer new cars on the road means more need for parts to keep the old cars running. That's just got to be good for AutoZone.

Furthermore, judging from the comments our CAPS members are voicing, you might think AutoZone were leveraged to the hilt. It's not. AutoZone has about $2.3 billion in long-term debt on its balance sheet. The company generates plenty of operating income, and boasts an interest coverage ratio of roughly 9.

What's more, these profits appear to be high-quality. Free cash flow backs up reported GAAP net income almost to the penny, meaning that AutoZone carries a reasonable price-to-free cash flow ratio of 13 (and an enterprise value-to-free cash flow ratio of 16).

Time to chime in
Personally, I don't think analysts' projected 12% growth rate for AutoZone is high enough to justify its valuation. I see little or no margin of safety in the stock, and I won't be buying AutoZone any time soon. But I don't think the price is so high that the stock must immediately collapse.

You're more than welcome to disagree. If you'd like to argue that the stock will fail, growl away.