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. According to the smart folks at finviz.com, these stocks have more than doubled over the past year, and they 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 more about an economic recovery, and less about the end of civilization as we know it. And as optimism trumps pessimism in the minds of investors, many stocks are capturing astounding gains.

Up above, you see three stocks that have doubled over the course of the past year. In two cases, Foolish readers had early warning of these advances. The clever stockpickers at Motley Fool Hidden Gems had Sotheby's and Atheros pegged as outperformers months before their gains materialized. But according to our Motley Fool CAPS investing community, there's even bigger prospect for profit in the shares of one company we have not picked (or at least, not yet.)

The bull case for ev3
For a five-star-rated stock, there's actually very little recent commentary on ev3. The most recent pitch we find on CAPS dates from early 2008, when CAPS member jroack touted ev3's "Merger with FOXH" as a deal that had "yet to pay off, but … should produce in time."

CAPS All-Star RTIGroup07 agreed, predicting that ev3 would "become a major player this year." And by all indications, both Fools were wise in their predictions -- beating the market by nearly 100 points apiece on their picks.

Less profitable, but more prescient, was the early recommendation of CAPS superstar DiscoJohn (ranked in the top one-half of one percent of investors tracked on CAPS). Writing way back in 2007, DJ pointed out how ev3 had already "released more products than any other peripheral vascular disease company. They've established their dominance on the market share, and that share is only going to increase as baby boomers age and minimally invasive procedures become more popular."

Popular for a reason
But ev3's popularity isn't limited to Baby Boomers -- and for good reason. The endovascular device maker simply destroyed the Street's earnings estimates last week. Its $0.11 per share in adjusted earnings topped expectations by more than 57%. Sales were up 23%, and that was only the start of the good news.

Looking forward, ev3 told investors to expect as much as $530 million in sales booked this year, an 18% improvement over 2009 -- which was ev3's first profitable year ever. Meanwhile, ev3's larger competitors, including Abbott Labs (NYSE: ABT), Boston Scientific (NYSE: BSX), and Medtronic (NYSE: MDT), are all still making do with revenue growth rates from 15% to as little as negative 2%.

Time to climb aboard?
Granted, all three of these companies boast operating margins significantly higher than ev3's, and consequently sport forward P/E ratios significantly lower than ev3 does. But does this mean the company's overpriced and due for a fall?

I don't believe so. The faster ev3 grows, and the greater economies of scale it reaps, the higher its profit margins should climb -- assuming one of its slower-growth rivals doesn't decide to snap up the shares at a premium, to capture ev3's growth trends on the cheap. Meanwhile, a still-independent ev3 sells for only about 35 times free cash flow, which seems reasonable if the company continues growing sales at the near-30% clip that Wall Street projects -- adding scale and improving its margins along the way.

Foolish takeaway
ev3's not the cheapest stock I've ever seen. But the company sports a strong balance sheet, the business has momentum, and the stock seems not too overpriced for its prospects. Will it continue to rocket higher? Well, that does seem to be the direction management's promising.

Do you believe they'll deliver? Tell us now.