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 reaped huge rewards this year, but if you ask the 140,000 investors working odds on Motley Fool CAPS, there's a good chance that the good times are at an end -- for some of these stocks, at least.

Fools do still like the chances at Brocade, and like Atwood even better. Why? That's what we're about to find out, as we drill down into ...

The bull case for Atwood Oceanics
CAPS member mrmok starts us off by stating the obvious case for this oil services company: "We will continue the need for fossil fuels until fusion becomes a viable option." (And if you know of a good cold fusion company to invest in, drop me a line.)

That's the big picture bull thesis. But oil services is a "big lake," populated by the likes of big fish Halliburton (NYSE:HAL) and Schlumberger (NYSE:SLB). Why should we prefer Atwood over the giants of the industry? ssbb123 explains: "Specializing in deep water drilling, making revenues per rig of $500,000 per day!! This is a long term play as oil becomes scarce the big boys are going to look to [Atwood] to reach hard to get to oil and gas pockets (or take over the company) either way its a win win."

What's more, MLIA0M09 says that when you "[c]ompare to Transocean this is one has much more growth potential. Personally I like them both but future for oil is uncertain ... I just can't believe that the pe of [Atwood] and other big oil companies now a days... single digits."

And yes, "single digits" does sound pretty good. But mightn't this stock be cheap for a reason?

That's the question that bugged me about Atwood, and after taking a close look at the cash flow statement, I think I've found the reason: That single-digit P/E is an illusion. Atwood's not nearly as profitable as it looks.

You see, Atwood reported some $277 million in profit over the last 12 months. Over the last 20 quarters (or five years), it's reported more than $672 million in profit. But would anybody want to hazard a guess at how much actual free cash Atwood has generated in the production of so much profit?

Answer: About negative $117 million total over the last five years. And over the last 12 months, Atwood actually burned cash -- nearly $190 million worth of the stuff.

Foolish takeaway
When you get right down to it, folks, this stock's a dud. A supposedly profitable driller that, over the course of one of the biggest oil booms in recorded history, was unable cumulatively to eke out honest-to-goodness positive free cash. A company that -- now that the boom has gone bust -- is burning cash faster than your Hummer burns gasoline.

So if you own Atwood now, and have benefited from this year's run-up, my advice is simple: Get out while the getting's still good.

Disagree? Feel free. Click on over to Motley Fool CAPS and tell me why I'm wrong.