"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.
North American Palladium
American Capital Strategies
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 palladium and gold mining have in common with mezzanine loan investing? What do either of these things have in common with building pickup trucks? The answer to both questions is this: Companies behind these processes are some of the hottest stocks on the Street.
Shares of Ford Motor Co. have more than doubled over the past 12 months, but CAPS member notashylock is pretty sure this stock still has fuel in the tank: Ford "continues to pick up market share, will continue to bounce from a equity standpoint."
CAPS member sjallyn is even more optimistic about American Capital, a one-time market darling that "was on a role until the great 'meltdown' " and that "should once again regain its momentum and start to fly. The faster the general recovery, the faster this should happen, it has been a year already, I figure another year or so and things should get back on track," this player wrote in September.
With the stock up 160% already, it's a popular opinion ... just not the most popular.
That honor goes to North American Palladium, winner of the five-star stock award on this week's list. Let's grab out pickaxes and headlamps, Fools, and dig deeper into this story. Maybe we'll strike gold. (Or perhaps palladium.)
The bull case for North American Palladium
NAP produces both gold and palladium -- and more. While not the biggest palladium producer (that honor goes to Stillwater Mining
More interestingly, CAPS member Gonzhouse confides that "while gold has been on a well publicized tear, palladium and platinum are doing as well or better. Plus palladium and platinum have significant industrial use , particularly in developing countries."
The question we face as investors is simple: What are the chances that North American Palladium will prove a rewarding investment? The stock's already doubled, after all. How much further can it run?
Rocket stock or dud?
Our CAPS members' enthusiasm notwithstanding, after reviewing the company's financials, my answer is going to have to be: "Not far now."
When I'm examining a potential investment, one of the first things I do is check to make sure the company is earning a profit. NAP is not. Some folks think it might earn something next year. But over the past five years -- years that have been very kind to other miners of precious metals, such as Yamana Gold
Foolish final thought
Now, I'm not saying North American Palladium is the worst stock on the planet (despite a passing resemblance). In fact, it might be a decent investment despite all the apparent strikes against it. (If you think so, you can tell us why right here.)
All I'm saying is that if investing in mining shiny rocks is your thing, there do appear to be a whole lot of companies that do it better than NAP. Speaking of which, our intrepid team of analysts over at Fool Central dug up a gem just the other day. Get a free report, and learn all about it when you click this link.
Ford Motor is a Motley Fool Stock Advisor selection. 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. 675 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.