"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 (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 doubled (or nearly so) over the past year, and just might be ripe to fall back to earth.
CAPS Rating (out of 5)
Strategic Hotels & Resorts
Companies are selected by screening for 100% and higher intraday 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.
Question: What do hotels have in common with rent-by-mail DVDs? What do either of these things have in common with biopharmaceuticals? The answer to both questions is this: The companies behind these products are some of the hottest stocks on the Street.
Reuters calls Motley Fool Stock Advisor recommendation Netflix "one of today's hottest companies in media," and recently praised the firm's "better-than-expected subscriber growth for [Q3], which in turn helped fuel a 31 percent increase in revenue." Already, the company that began life posting DVDs to renters by mail has evolved into a digital movie streamer 17 million subscribers strong; only Comcast
Less high-profile than Netflix, luxury hotel REIT Strategic Hotels has done for its shareholders nearly as well, climbing 158% in value over the past year. Investors will be looking for the winning streak to continue when the company reports its own Q3 earnings on Wednesday.
Of course, the real question is whether these companies can maintain momentum over the quarters ahead? Their two-star ratings on CAPS suggest that, by and large, Fools doubt their prospects. But there is one rocket stock on today's list about which investors are more optimistic. Let's read on, and see what we can learn about ...
The bull case for ViroPharma
CAPS All-Star tutaemeia introduced us to ViroPharma a couple years ago as a company engaged in "the commercialization, development, and discovery of new antiviral medicines ... focusing on a number of ribonucleic acid virus diseases, including viral meningitis, viral respiratory infection, the common cold, respiratory syncytial viruspneumonia, and hepatitis C."
Rocket stock or dud?
I'll say. With a stock that's more than doubled over the past year, ViroPharma is certainly one of the more successful businesses out there today -- a fact it confirmed Wednesday, when it reported a near-doubling of net profit on 69% sales growth of Cinryze, and 31% growth for Vancocin.
But this story gets even better. All too often, when you come across a popular biotech with a market cap of a size with ViroPharma's (give or take), it turns out that the company's being valued more on its potential than on what it's actually doing today. Whether a bit bigger, like Incyte
Boasting $405 million in annual sales, and profits big enough to give it a P/E of only 13.4, ViroPharma seems poised to outperform the market with its predicted 15% long-term growth rate. Better still, GAAP profits actually understate the company's true profitability. Over the past 12 months, ViroPharma has generated $178 million in free cash flow, dwarfing the $100 million it reported as "net profits" under GAAP.
Time to chime in
Valued at barely 7 times free cash flow, and expected to grow at more than twice that rate, boasting nearly $450 million in cash on its balance sheet, and less than $145 million in debt, ViroPharma looks to me like a rocket stock with plenty more fuel in its tank.
Of course, that's just my opinion, and maybe you disagree. If so, here's your chance to set me straight. Click over to Motley Fool CAPS today, and tell me why ViroPharma is anything but a strong buy. I'm listening.
Fool contributor Rich Smith does not own (or short) shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 583 out of more than 170,000 members. The Fool has a disclosure policy.
True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.