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. 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 100% and higher price appreciation 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 this year, and if you ask the 135,000 investors (and counting) who occupy the judges' stands on Motley Fool CAPS, this is only the beginning. These stocks are destined for greatness, every one.

But none more so than a certain Brazilian sugar maker. Read on as we explore ...

The bull case for Cosan
CAPS All-Star SimonSaysSell puts his reputation on the line (and his name in question) by recommending that you buy Cosan. Why? Because it's "a good play on sugar/ethanol which I think will move higher; taking this stock with it." Short and, er, sweet.

crissens gave us a little more detail on the ethanol side of the equation last year: "As oil prices rise, sugar ethanol will become a more affordable fuel option. GM, Ford [ (NYSE:F)] already have the technology to create dual fuel cars. ... In addition, sugar ethanol is more efficient, cheaper and productive than corn ethanol."

And according to A6EIntruder, Cosan is the best play on ethanol refined from cane sugar: "Cosan is in a business it can win: climate and resources dictate that Brasil can beat all comers at the ethanol game. What's to keep them from succeeding in certain markets? Tariffs and subsidies. I predict that over time American lawmakers will come to see the folly of restrictive tariffs as we seek to wean ourselves off Middle Eastern oil."

Yet people have been losing money for centuries betting against the folly of American legislators. How certain are we, really, that this time will be different?

Well, check the headlines. You may have noticed that a lot of big companies in the food industry have been raising a ruckus over sugar shortages lately. Last week, officials at Hershey, General Mills (NYSE:GIS), Kraft (NYSE:KFT), and others signed a letter to Secretary of Agriculture Thomas Vilsack. In it, they warned that if they didn't receive lower tariffs on imported sugar, "consumers will pay higher prices, food manufacturing jobs will be at risk and trading patterns will be distorted." Not the kind of news the Obama administration wants to hear in the midst of a recession -- or legislators with a midterm election campaign looming.

Once these companies start throwing their lobbying dollars around Washington, there's no telling how much sense they might be able to buy, even to the extent of encouraging foreign sugar-based ethanol. But is it a great investment thesis to bargain on a change in legislation that may or may not come?

Time to chime in
In Cosan's case, the answer is no. The company's reported an annual profit only twice in the past five years, after all. And even then, these were just "accounting profits." Fact is, Cosan never generated so much as a penny of honest-to-goodness annual free cash flow from its business in that period.

The way I look at it, betting on Congress to do the sensible thing is risky enough. Betting on a historically cash-burning enterprise to suddenly turn itself around and make money for its shareholders, though, is a complete roll of the dice -- and not one I'm prepared to make.

Or so says me. What say ye? Click over to CAPS now, and tell us what you think.

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