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 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. Five stars = highest possible CAPS rating; one star = lowest. Current pricing provided by Yahoo! Finance. 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 about an economic recovery more ... and less about the end of civilization as we know it. Reports out of the Institute of Supply Management tell us that manufacturing activity grew in March, and depending on how you read the data, it's even possible we're seeing "green shoots" in the American labor market. So, is now the time to buy back in?

Not necessarily. And if you ask our CAPS community, now's definitely not the time to buy the stocks that everyone else has been buying. Fact is, Fools remain downright glum about the prospects for most of the stocks that have profited best from the rally. And here's the really bad news: You see the one stock on today's list that investors do believe has a future? DreamWorks Animation?

The bull case for DreamWorks Animation SKG
I know, I know. Everybody loves DreamWorks these days. CAPS member esalazar79 calls the company "in-expensive" and "kid friendly." Likewise, dmpilot sees nothing but goodness in the DreamWorks "stable of great film titles and the diversification of other products."

And from the M&A point of view, as we mentioned last month, FinerPoints sees DreamWorks as: "Last man standing" now that Disney just bought Marvel." To hear FP tell it, it's only a matter of time before Time Warner (NYSE: TWX) buys DreamWorks -- and maybe he's right. All I am saying is that unless DreamWorks shareholders get themselves bailed out by greater fools (note the lack of capitalization), they're bound for disappointment with this stock.

Bailouts, and other pipe dreams
Why am I so down on DreamWorks? Last month, I wrote that "within the fetid swamp of overpriced equities that is the film industry, DreamWorks smells slightly less stinky than the moderately overpriced Disney, or the up and down but usually profitless wonder that is Lions Gate (NYSE: LGF). ... that I'd still rather "kiss a frog than sink money into DreamWorks?"

Why? Because it costs too much. It cost too darn much last month, and it still costs too much today.

Over the six weeks since I first panned it, DreamWorks shares have already shed 10% of their value -- versus a 7% gain for the S&P 500. Yet even today, what we have in DreamWorks is a dividend-less stock, that costs in excess of 23 times earnings, sells for an even more frightening 35 times free cash flow, and yet is projected to grow at barely 16% per year over the next half decade.

Foolish takeaway
Fools, these are numbers that should frighten the short-pants off of animation fans and value investors alike. No matter how much you like the movies, there's simply no way this stock can maintain its price at this valuation. As much of a dud as DreamWorks has already proven itself to be, make no mistake -- it's going to bomb even worse in quarters to come.

Or so say I -- but don't be shy. If you disagree with my take on DreamWorks, here's your chance to "silence the critic." Click over to Motley Fool CAPS now, and tell me why I'm wrong.

Motley Fool CAPS: It's fun, it's free, and it just might make you famous.