Rocket Stock or Dud?

Editor's note: A previous version contained a CAPS pitch attributing the manufacture of the Smartboard to Smart Modular Technologies. The Smartboard is not made by Smart Modular, but by Smart Technologies, a private company. The Fool regrets the error. 

"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 upward.

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, 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 companies, but can they maintain momentum through the rest of the millennium? A survey of our 145,000 CAPS members suggests the prospects are bleak -- with one exception …

The bull case for SMART Modular Technologies
Way back in 2007, CAPS member anderwm spotlighted Smart Modular as an outperformer. Although "almost completely dependent on [Cisco (NASDAQ:CSCO) and Hewlett-Packard (NYSE:HPQ)] wanting their products," anderwm argued, "as demand for more dense memory increases I feel they will do well."

A Fool chimes in
Fast-forward a few more months, and in January we saw SmartMod get yet another vote of approval from my Foolish colleague Brian Pacampara. Observing the stock's remarkable rise off its December lows, Brian argued that the company served as an object lesson to investors: "Never become anchored to a stock's previous price levels. Regardless of past gains, a stock can always go higher if the story remains sound, the fundamentals keep improving, and the valuation remains cheap relative to its future growth potential."

But here's the problem: I'm not so sure Smart Modular has potential. Analysts don't expect the company to achieve even 10% growth over the next five years. And with only minimal GAAP profits to its credit, and free cash flow of just $18.2 million, what little potential this stock does have seems more than accounted for in today's stock price. 

Foolish takeaway
Of course, that's just my opinion. I could be wrong, and I'm certainly in the minority view on this stock. Also … I have to admit that unimpressed as I am with the company's earnings and cash flow, the balance sheet on this one is positively pristine -- $129 million in cash, or enough to pay off the firm's modest $55 million debt load more than two times over. With a balance sheet this good, I see little risk that SmartMod, the company, will turn out to be a time bomb.

But as far as the stock goes? Yep, it's a dud.

Got a contrary opinion on Smart Modular Technologies? We've got a place to tell it: Click over to Motley Fool CAPS now, and tell me why I'm wrong.