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 doubled (or nearly so) over the past year, and just might be ripe to fall back to earth.

Companies are selected by screening for 100% and higher intraday price appreciation over the last 12 months on finviz.com. Current pricing provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

Question: What does silver mining have to do with selling plane and hotel tickets online? What do either of these activities have in common with the treatment of hepatitis C? Answer: Companies behind these endeavors boast some of the hottest stocks on the market today. Over the past year, priceline's share price has doubled, while shares of InterMune and Silver Wheaton have both gained roughly 170%.

[Pause for applause.]
Congratulations all around. But now that the stocks have taken their bow, it's time to ask the important question: Which of these companies will excel in 2011?

CAPS All-Star portefeuille is so sure it'll be InterMune that he's both rated the stock an outperformer on CAPS and placed "230 shares in my portfolio." CAPS member livinglearning is still backing Motley Fool Stock Advisor recommendation priceline.com, arguing: "I'm just not sure how anyone can bet against this company. They have proven themselves over and over again. ... They have great management and all they do is beat expectations year in and year out."

However, these Fools remain in the minority, and their stocks remain unloved (you can tell by their star ratings). Poll the broader CAPS community and the verdict is clear: If you really want to make money in 2011, the gold-medal favorite is Silver Wheaton.

The bull case for Silver Wheaton
Why buy Silver Wheaton? CAPS member jtnrt330 has a simple answer: "well run company - Smart management with a great work model."

All-Star investor 3DeeFool elaborates:

Silver Wheaton approaches gold mining companies about buying their silver byproduct. Gold companies want to be primarily gold producers, not gold-and-silver producers. But because silver deposits often occur alongside gold deposits, silver is often a byproduct of gold mining. Silver Wheaton approaches mining companies with cash in hand. ... It gets all the silver that comes out of the mine for just $4 per ounce. With silver at $29 right now, Silver Wheaton nets $25 per ounce of silver.

I have to say, that does sound like a pretty fabulous business model. Fellow Fool and precious-metals enthusiast Christopher Barker also endorsed Silver Wheaton last summer: "Silver Wheaton's essentially fixed-cost business model offers investors a ... reliable means of calculating future cash flows, corresponding to their own anticipated price trajectories for silver." Christopher favorably compares the idea to how Taseko Mines (NYSE: TGB) runs its gold business, and prefers this approach over straight silver-mining plays like Hecla Mining (NYSE: HL) and Silvercorp Metals (NYSE: SVM).

Foolish takeaway
Still, I'm leery of Silver Wheaton's stock for the simple reason that I don't like the free cash flow numbers I'm seeing. Over the past year, Silver Wheaton's generated only about half as much cash profit as its GAAP earnings statements would suggest. Hecla and Silvercorp -- and Pan American Silver (Nasdaq: PAAS) even more so -- outscore Silver Wheaton in this regard.

On the other hand, I must admit that today's free cash flow picture looks a lot better than it has in years past, when Silver Wheaton was burning cash. If Silver Wheaton's recent performance turns out to have marked an inflection point, where free cash flows begin first to catch up to, then race ahead of, reported earnings, I'm almost certain to regret not hopping this profits train.

What's your opinion of Silver Wheaton? Is this just another precious-metals hype stock, or is this story gaining real credibility? Cast your vote on Motley Fool CAPS.