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 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 have more than doubled over the past year, and just might be ripe to fall back to earth.

Companies are selected by screening for 100% and higher price appreciation over the last 12 months on finviz.com.
Price and CAPS ratings from Motley Fool CAPS.

Since the darkest days of early 2009, a change has come over the markets. People are starting to talk more about an economic recovery and less about the end of civilization as we know it. With the renewed economic optimism, stocks are on the march (up) once more, and each of the companies named above sports a stock price at least twice what it was one year ago.

What's more, many of these stocks may score even bigger gains in the future -- or so our CAPS members believe. Hopes shine brightest for millers of a certain steely metal: ArcelorMittal. But will this particular rocket stock continue to drive upward, or crash back to earth?

The bull case for ArcelorMittal
CAPS member FreedomTrader1 calls ArcelorMittal: "a great international steel play. Largest on the ... planet with operations in over 50 countries. Poised to profit foolishly from global economic recovery."

And BigDiv agrees. "As the economy continues to recover, global steel prices will increase. ArcelorMittal is a company that is weathering the global economic storm like a pro."

In particular, blue2fire argues that "infrastructure projects being put up at a rapid pace in emerging economies will only accelerate in the foreseeable future."

You may be right. I may be crazy
Depressed profits have ArcelorMittal trading at the apparently obscene price-to-earnings ratio of 527, yet metals analysts remain bullish. Expecting that a global rebound will improve ArcelorMittal's profits to the point that its P/E ratio will drop back into the single digits next year, a majority of the analysts following this company agree with our CAPS members that the stock's a "buy." But are they right?

They may well be. I'll admit the possibility. But consider: ArcelorMittal generated $4.5 billion in free cash flow last year -- just a bit more than the amount brought in during 2006. Yet in 2006, the stock regularly traded in the low $30 price range. How then can we justify ArcelorMittal selling for more than $40 today, a roughly 50% premium to what the stock was fetching before the global economy went to hell in the proverbial handbasket?

Buy these numbers? No thanks
Personally, I can't justify it. I think it's crazy-outta-whack with reality. ArcelorMittal may be a better deal than certain of its cash-burning peers (U.S. Steel (NYSE: X) and AK Steel (NYSE: AKS), I'm talking to you) but that's really the best I can say about it; that ArcelorMittal's a relative bargain.

You see, while it's true that ArcelorMittal at least generates positive free cash flow, it still sells for more than 14 times the amount of free cash it generated last year. Yet even ArcelorMittal's analyst fans agree that it will probably grow only at about 10% per year over the next half-decade. When you consider there's a massive debt load on top of all this -- over $24 billion in debt, versus just $6 billion in cash on the balance sheet -- I just don't see a whole lot of value in the stock.

Time to chime in
I continue to believe that steel investors will do a lot better by investing in something like Nucor, which, while not a screaming bargain itself, at least offers a higher expected growth rate than ArcelorMittal, alongside a much healthier-looking balance sheet. But that's just me.

I realize that ArcelorMittal has a lot of fans. If you're one of them, and you take issue with something I've said, here's your chance to respond. Click over to Motley Fool CAPS now, and tell me why I'm wrong.