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. These are 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 price appreciation of 100% and higher 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 over the past five months. But if you ask the 130,000 (and counting) investors who make up Motley Fool CAPS, not all of them deserve those gains. One stock in particular stands out as particularly lacking in investor love. Let's find out why, as we examine ...

The bear case against Sprint Nextel
CAPS member wolfhounds paints the bear thesis in stark terms:

In 2008 every broadband carrier except [Sprint Nextel] increased subscribers. In fact, the company lost a substantial customer base to [AT&T (NYSE:T) and Verizon (NYSE:VZ)]. even small operators are adding to their base as are some cable operators. Add that to a huge debt load and this company's recent doubling in share price is absurd.

But it gets worse. According to CAPS All-Star rpgizzle, not only is Sprint ceding "subscribers to better networks," but it also has "poor phone selection (pre is not as good as the current iphone or Blackberry 8900 or Curve). Investment in 4G is useless. 3G already causes battery life issues in most phones...batteries don't have enough juice to provide long operating time with 4G power demands."

In sum, fellow All-Star devoish concludes:

Investors may be voting yes, raisng the share price from $2.00 to $4.00, but it appears customers are voting no as revenue is falling. Combine that with 22bil in debt, tough competitin from [Verizon] and [AT&T], and this is likely the odd consonant out. Someone will do very well buying this companies assets out of bankruptcy.

Scared yet? Then you might want to sit down for this next bit: Over the past five years, Sprint has reported losses in excess of $30 billion. (That's banker-size losses, folks.) Sprint lost money last fiscal year. Analysts predict it will lose money again this year, and then post an even bigger loss next year.

So is all hope lost?
It sure sounds like it, doesn't it? But before you hit the panic button, consider that second star in Sprint's CAPS rating. If all hope were lost, you'd expect investors to be rating this stock one star, and trying to figger a way to turn even that one star into a black hole. The second star suggests that maybe, just maybe, there's something missing in this picture.

That missing link, I submit to you, is cash flow. You see, despite the massive reported losses, Sprint was actually generating quite a lot of free cash these past few years -- $16.9 billion in aggregate over the last five fiscal years. According to wolfhounds, Sprint's CEO has promised that: "[Sprint Nextel] will be cash flow positive this year." And indeed, over the last 12 months, Sprint has generated $2.8 billion in free cash flow.

Time to chime in
Personally, I don't believe that even this last number suffices to justify Sprint's current $15 billion market cap (at least, not with the company carrying around $17 billion in net debt on its balance sheet.) To me, the stock looks like a "sell," period. But so what?

The real point of this column, you see, is not to tell you what I think about Sprint Nextel -- or even what other CAPS skeptics are saying. What we really want to know is whether you think that Sprint has a future. If you've got an opinion, we've got a place to publish it.

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