Which Stock Falls First?

"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.

Every day, finviz.com publishes a list of stocks whose shares have just hit new 52-week highs. Every day, investors read the list and tremble -- some with greed, others with terror. Within our Motley Fool CAPS investing community, these top stocks generally enjoy favorable ratings, since everyone loves a winner… but not always:

Companies selected by screening for new 52-week highs hit on the Thursday before publication. Low and recent price provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

Whenever a stock hits new 52-week highs, the law of gravity naturally prompts investors to wonder how long the good news can keep coming. Still, CAPS members seem unconcerned about the valuations on the first two stocks on our list. Notwithstanding its nosebleed 56 P/E ratio and merely respectable 14% long-term growth forecast, NVIDIA enjoys strong support from CAPS members, with a four-star rating. (What's behind all the optimism? Find out here.)

While pricey NVIDIA's popularity is a bit of a mystery, the attractions at InterDigital are downright obvious. It's got a cheap P/E of 13, a modest 0.9% dividend, and analysts expect the company to post 17.5% annualized growth over the next five years.

Unprofitable Cheniere Energy and debt-laden American Capital Agency are less popular, not surprisingly. But Fools seem most pessimistic about the oft-maligned Wynn Resorts. With a 367 P/E and a one-star CAPS rating, is this the 52-week high-hitter most likely to drop dead soonest?

The bear case against Wynn Resorts
CAPS member Endeavor1 lays down the bear case:

Let me get this straight. Chinese that are measurably hyper leveraged in real estate exposure are going to have sustained resources to fund gambling-centric vacations. And no discernible correction to the drivers of the downturn 18 months ago has occurred. Oooof... that seems like the worst odds in the house.

All-Star investor jgknot seconds that emotion: "With china tightening and slow recovery expected out of US for some time, Wynn growth est of 30% for the next 5 yrs may be in trouble. … Insider selling is on the rise too from mid november."

And our very own TMFBomb recently chimed in with a broadside, featuring Wynn in a column entitled "5 Stocks to Sell for 2011." Could Fools hate Wynn any more?

Actually …
Yes, they could. Because if you read past the headline on TMFBomb's column, it turns out that he really doesn't hate Wynn. Instead, he calls the company:

… my favorite of the Big Three Las Vegas casino operators. Its balance sheet, though leveraged, is much stronger than those of MGM (NYSE: MGM) and Las Vegas Sands (NYSE: LVS). I also like its conservative-compared-to-MGM-and-Sands growth strategy. And if I'm going to gamble with any casino's management, it's with the bold, straight-shooting Steve Wynn.

While he's leery of the stock's soaring P/E ratio, TMFBomb isn't nearly the Wynn-pessimist that you might think. And neither am I -- anymore. While Wynn and I have had our differences in the past, when facts change, so can my opinions.

Lately, Wynn has rediscovered the ability to generate free cash flow . After years of burning the stuff, Wynn has reversed its profligate ways. At last report, it was generating nearly $470 million in free cash per year. Granted, that's only enough to bring the price-to-free cash flow ratio on the stock down to 31, which is still pretty steep. But if the company manages to match Wall Street's consensus 29% growth rate (and in fact, it's exceeded Street estimates in three of the past four quarters), the stock really isn't as overpriced as it seems.

Foolish takeaway
The "52-week highs" list makes for a starting point when seeking out potential short ideas. But in Wynn's case, the price doesn't look too high, or too lacking in justification for its royal "highness." As long as the cash keeps rolling in, Wynn could continue its winning ways.

Think I'm wrong? Go to Motley Fool CAPS and place your bets now.