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. Current pricing provided by Yahoo! Finance.

Each of these stocks has posted huge gains this year, but if you ask our 140,000 CAPS members, they'll tell you all the gains that were to be had, have already been had. So is now the time to collect our 100% profits and go home?

In many cases, yes. But in one case -- perhaps not. Read on and find out all about ...

The bull case for Infosys Technologies 
Earlier this month, fellow Fool Tim Beyers suggested that Infosys just might be the best stock idea still on the market. But he's not the only investor thinking along these lines. CAPS member InvestingMonk praises Infosys's: "Superb balance sheet," and status as an "industry leader" in a "growing market." He's pretty sure Infosys will: "outperform in a number of years."

CAPS All-Star xiaolifeidao agrees, aguing that: "IT outsourcing is an unstoppable trend, I know this since it grows more and more right in my work environment. INFY is the No.1 player in this area. No doubt it will keep 15%-20% revenue/profit growth for at least 5 yrs, so will be the stock price."

And fellow All-Star investor 00100 likes the firm's: "Excellent cash flow. 31% 5 year sales growth. Steady spending of 26% on capex. Very large cash on-hand (quick ratio of 5.7). No debt."

Fact is, there's an awful lot to like about Infosys. Take the "excellent cash flow" that 00100 mentions, for example. In the course of interviewing the company's CFO last year, I took Infosys to task for generating less free cash flow than it reported as "net earnings" under GAAP -- a problem that did not seem to bedevil major international rivals like IBM (NYSE:IBM) and Accenture (NYSE:ACN).

Mr. Balakrishnan's response was that, unlike its Western competitors, India-based Infosys had to spend a lot on building up its capital infrastructure in order to keep the cash flowing. But judging from the firm's financial statements, this may be starting to change. Free cash flow for the last 12 reported months ($1.3 billion) now exceeds reported net income. As a result, the stock trades for about 22.5 times annual free cash flow today, or slightly less than its 22.7 P/E. For a company that most Wall Street analysts expect will grow at 18% per year over the next half decade, that's not a half-bad price.

But Infosys is even cheaper than that. Now that it's got its cash machine running overtime, the company's amassing a growing cash hoard on its balance sheet -- $2.9 billion at last report, and as 00100 mentioned, "no debt."

Foolish takeaway
Combine a pretty attractive valuation, strong growth prospects (and proof of the ability to generate strong growth historically), and a rock solid balance sheet, and I see no reason Infosys investors should not continue their rocket-ride going forward.

But hey, that's just my opinion. I could be wrong. If you know something about Infosys suggesting this stock's more likely a dud than a rocket, here's your chance to tell the world about it. Click on over to Motley Fool CAPS now, and sound off.

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