"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.

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.

Company

 

52-Week Low

Recent Price

CAPS Rating
(out of 5)

Netgear (NASDAQ:NTGR)

$8.21

$18.79

*****

Hewlett-Packard (NYSE:HPQ)

$25.39

$48.56

***

American Express (NYSE:AXP)

$9.71

$34.58

***

Microsoft (NASDAQ:MSFT)

$14.87

$28.02

***

Deckers Outdoor  (NASDAQ:DECK)

$37.24

$97.18

***

Companies are selected from the "New Highs & Lows" lists published on WSJ.com on Friday last week.
52-week low and recent price provided by Yahoo! Finance.

Each of these companies hit a new 52-week high last week. But must that which has gone up ... come down?

Not according to the 140,000-plus investors who comprise Motley Fool CAPS. To the contrary, Fools think most of these stocks are pretty fairly priced, and capable of at least matching the market's returns. And we expect one of 'em to do quite a bit better than that. Read on, as we examine ...

The bull case for Netgear
Once upon a time, a very bright man by the name of Peter Lynch advised us to "buy what you know." Fools are taking that message to heart:

  • Reviewing Netgear last October, when the stock was trading for 10 times earnings, JP1031 mused: "I've owned Netgear products and they are very reliable and easy to use." Seeing "no debt and a decent profit margin," JP1031 rated the stock an outperformer.
  • Similarly, Mudmonkey confided: "I use NETGEAR products, they are excellent value for the price. The company is solid, and the stock seems very undervalued."
  • Most recently, CAPS All-Star Orthonormal placed a stamp of approval on the company, saying: "In my experience, Netgear's home networking products are easier to use, more reliable and compatible, and even better looking than competitors' products, at comparable prices. As long as management doesn't make any large blunders, they should be successful."

Cheap, easy to use, and attractive? Sounds like a winning combination to me (and bad news for rivals 3Com (NASDAQ:COMS) and Cisco (NASDAQ:CSCO)). Of course, we're not looking to buy a router today -- we're looking to buy a stock. So what can we tell you about Netgear the company?

Bad news first
On the minus side, sales dropped 5% in the most recent quarter, and while Netgear earned a small profit, it wasn't enough to prevent the company from losing money, in aggregate, over the past 12 months. (Admittedly, not a great start.)

But on the plus side, Netgear did earn that small profit. What's more, analysts expect to see growth return with a vengeance next year, as earnings triple off of this year's low base to hit $0.90 per share. Further out, Wall Street is predicting 15% five-year annualized profit growth for the company.

There's no doubt in my mind whether Netgear will survive to enjoy that profit. It will. With no appreciable debt and $234.5 million in cash, "rock solid" doesn't begin to describe the strength of Netgear's balance sheet. Nor is management content to sit on its cash and wait out the recession -- oh no. At last report, Netgear had generated $73 million in free cash flow over the past 12 months, so its cash pile is getting bigger by the day.

Time to fall?
Valued on free cash flow, Netgear looks to be trading for less than nine times, and that's not even counting the ginormous cash stash. The way I look at it, if Netgear can achieve even half the 15% growth rate Wall Street predicts, the stock's still fairly priced today. Simply put, there's no reason to expect this stock to fall. To the contrary, I believe it's got a lot more room to run.

But hey, that's just my opinion. If you've got an argument against Netgear, we've got a place to state your case. Click on over to Motley Fool CAPS, and sound off.

Netgear is a Motley Fool Stock Advisor pick. American Express and Microsoft are Motley Fool Inside Value recommendations.

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. 756 out of more than 140,000 members. The Fool has a disclosure policy.