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 in the last half of '09, and just might be ripe to fall back to earth.

Companies are selected by screening for 100% and higher price appreciation over the last six months on finviz.com. Five stars = highest possible CAPS rating; one star = lowest. Current pricing provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

Last year's last-half market rebound was kind to these stocks, but can they maintain momentum through the rest of the Millennium?

A survey of our 145,000 CAPS members suggests the prospects for many of last year's stars are bleak. But there's one stock star they expect to see still shooting 'cross the skies when Dec. 31, 2010 rolls around. Let's find out if they're right, as we examine ...

The bull case for Dow Chemical
If ever there was a stock that needs no introduction, it's Dow -- but we'll let lastingimp do the honors just in case: "DOW products are consumed by almost every part of the world businesses, their products are necessary components in almost every industry, as the world economy grows and developing countries emerge they will all need DOW items, there are many new items in the pipeline and many patents pending."

What's more, SuperchargedMR2 believes that over time, we'll see Dow: "Moving to higher-margin chemical products with Rohm & Haas acquisition; good overseas exposure and a widening moat in GMO crops."

"Will the transformation succeed?" xserver asks and answers the question thusly: "Earnings expected to be $3 or more in the next few years...maybe even $10. At historic low P/E of 10x, this places the stock at its current price. However a higher P/E of 20x places it at $60 ... if the EPS reaches 10 it could be $200/share."

Will Dow dominate the Dow?
Wow. Forgive me for saying so, xserver, but ... please put down the bong. Or at least remember to exhale periodically. I mean, seriously, $200 per share? That would value the company at $230 billion -- bigger than Walmart (NYSE:WMT) or General Electric (NYSE:GE). It just ain't gonna happen. Not for a staid ol' chemical concern like Dow.

Now, I'm not saying there's no profit potential here. In fact, if Dow manages to start earning $3 a share (as opposed to the $1.33 that most analysts expect it to earn this year), it's a safe bet that the stock price will go up (albeit, probably not seven-fold. Not off a starting market cap of $30 billion.)

Problem is, I don't see $3-a-share happening any time soon. Right now, Dow's producing sub-2% operating margins, and posted a loss for the last 12-month period. Even with growth resuming, analysts don't expect the stock to grow much faster than 12% per year. Depending on where they set the baseline for this estimate -- at this year's expected $0.46-per-share profit, or at next year's buck-thirty-three -- it could probably take Dow anywhere between seven and 17 years to reach $3-per-share earnings.

Foolish takeaway
Suffice it to say that such prospects make Dow resemble a slow-moving freight train more than a rocket stock. Maybe if it paid a bit more than its meager 1.9% dividend yield, I'd be willing to go along for the ride. But as things stand, I'm afraid the verdict is clear: This stock's a dud.

(But hey, that's just my opinion. You are certainly free to disagree -- and in fact, the more strongly you do disagree, the more we'd like to hear from you. Help keep the Fool Foolish, and the discussions interesting -- click here to tell us why you think Dow will dominate.