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 (and if the company was less than great in the first place ...) Below I list a few stocks that may have done just this. 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. Current pricing provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

These are a few of our favorite things ...
Specialty pharma, semiconductors, Chilean pensions. The stocks populating today's list have almost nothing in common, except for one thing: Investors are eating them up. Over the past 52 weeks, shares of intellectual property licensor ARM have gained more than 170%, dermatology drug developer Valeant a nearly as-impressive 150%, and even little-heard-of AFP Provida has turned in a clean double (including its dividends).

And plenty of Fools believe there are more gains in store. 08PortfolioModel makes the bold (if unsupported) claim that Valeant is a stock that can "only go-up." Meanwhile, CAPS members traviskang and fundamentalsrock combine to lay out a more defensible argument in favor of ARM. On the one hand, FR argues "ARM technology is crucial to just about every mobile smartphone made." On the other, TK highlights ARM's "profitable licensing agreements" and argues this makes the company a potential "take-over target by any of [Apple, Intel (Nasdaq: INTC) or AMD (NYSE: AMD)]." (Why pay royalties on the milk when you can just buy the cow?)

Not everyone's convinced, however. In fact, the more common consensus on CAPS seems to be that after having run up so far, so fast, there's not much room left to run at either Valeant or ARM today. In contrast, the relative unknown that is AFP Provida is considered a good value even at today's' prices. But why?

The bull case for AFP Provida
The "AFP" is a Spanish acronym denoting the company's business as a pension fund association, the largest of five such private companies granted the right to manage employee pension funds in Chile. Provida manages $32 billion worth of the contributions from 1.7 million contributors.

CAPS member tytymhorau has been watching this one since early summer, predicting Provida was "poised to profit from the region's growing middle class and accompanying improving standard of living."

MichaelHamilton calls it a "solid growth story / low pe good for short term / long term investment." Even better, cashsage points out that "PVD is a top yielding stock."

And really, I think that has to be the real attraction for this stock -- Provida's monster 9.2% dividend yield towers above the payouts from local rivals Banco Santander-Chile (NYSE: SAN) and Banco de Chile (NYSE: BCH). On top of that, the stock doesn't look at all expensive at a mere 7.5 times earnings.

Foolish final thought
Granted, it's hard to put that valuation in perspective, seeing as no analysts follow the stock, and no one seems to know how fast it might grow.

The folks over at Motley Fool Global Gains, however, point out that Chile is expecting to post 4.5% GDP growth this year, and argue that Provida should be able to grow its earnings even faster than that -- which suggests the 7.5 valuation shouldn't be too high a hurdle to leap. Between the low price and that big dividend boost, I expect AFP Provida will reward investors for years to come.

Disagree? Feel free. Click over to Motley Fool CAPS now, and tell me why I'm wrong.

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