"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.
I readily admit that stocks can 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.
But 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 have nearly or entirely doubled over the past year, according to finviz.com, 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. Five stars = highest possible CAPS rating; one star = lowest. Current pricing provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.
What do fiber lasers, mining gold, or licensing "processor architectures" to the semiconductor industry have in common? The companies behind these endeavors boast some of the hottest stocks on the market today. Over the past year, shares of fiber laser-maker IPG have more than tripled in value, while both MIPS and Paramount have more than doubled.
Congratulations all around
These stocks definitely deserve a round of applause -- but after their superb performance last year, which of them will excel in 2011?
CAPS member BHatch13 is gambling on a goldmine at Paramount, and hoping that when the company updates its "resource report by the end of March 2011 with at least 5,000,000 ounces expected," the stock should "triple or double."
CAPS All-Star GundersonGroup isn't quite that enthusiastic about MIPS, but this CAPS member does believe that at a valuation of less than 22 times earnings, it makes for a conservative long smartphone play when "paired with short on [ARM Holdings
If ARM is too expensive at 80 times earnings, what might GundersonGroup have to say about IPG at the relative bargain P/E of 45? Fortunately, while this member hasn't yet chimed in on IPG, several of our other CAPS investors have. Here's what they have to say about the sole stock on this week's list that sports an above-average, four-star CAPS rating.
The bull case for IPG Photonics
CAPS member TepperJason notes that while the stock has more than tripled from its year-ago price, IPG remains nearly 10% off its high -- prompting this Fool to rush right in.
Fellow Fool buffalonate seems equally eager. Calling IPG the "best laser maker in the business," buffalonate predicts that this stock will bounce right back, and continue to run for a long time. So does jstanub, who argues that IPG has "a large head start on potential competition" from rival laser-makers such as Coherent
In one respect, I have to agree. When it comes to valuation, IPG is leaps and bounds ahead of its rivals. Selling for 45 times earnings, IPG's valuation dwarfs the 26-ish P/Es at Coherent and Rofin-Sinar. By this metric, the stock's easily three times as pricey as Newport. On the other hand, it's also expected to grow much faster than all three of these competitors. Is that reason enough to buy it?
Personally, I vote "no." Paying 45 times earnings for a projected 24.4% long-term grower like IPG seems folly to me, though others clearly disagree. I might be persuaded otherwise if the company's cash flow statement showed that IPG were generating free cash flow in excess of reported earnings, as sometimes happens. Alas, the opposite is true. This company's financials show that while it reported "net income" of $54 million last year, IPG actually generated cash profits of only $35 million.
Time to chime in
As a result, a stock that looks overpriced at 45 times earnings seems even more expensive to me at nearly 69 times free cash flow. It even rivals ARM in overvaluation! In short, I wouldn't invest here at all.
Would you? Click over to Motley Fool CAPS now, and tell us why.
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. 515 out of more than 170,000 members. Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.