"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 sometimes, stocks rise for a reason. But other times, the rise becomes the reason. No matter how often we caution them not to, investors 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. Below I list a few stocks that may have done just that -- 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):
National Oilwell Varco
Companies are selected by screening for 100% and higher intraday price appreciation over the past 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 does deep-sea oil drilling have in common with Chinese Internet advertising? And what do either of these things have to do with construction-equipment rentals?
The answer is that the companies behind these endeavors boast some of the hottest stocks on the market today. Over the past year, shares of oilfield-services provider National Oilwell Varco have just barely doubled, while Sina's stock is up 170%, and United Rentals an astounding 287%.
[Pause for applause.]
Congratulations all around. But now that the stocks have taken their bow, it's time to ask the important question: They've all done well over the past year, but which of these companies will excel in 2011?
You might think that after a nearly four-bagger performance, United Rentals wouldn't have any fuel left in the tank -- but according to CAPS member don1941t, you'd be wrong. So long as the economic recovery remains tentative, our CAPS participant thinks this "construction equipment renter will continue to benefit … as builders rent rather than invest in … purchasing expensive equipment."
Heavy machinery not your bag? If that's the case, then CAPS member Gordogato would suggest that you look at a company with a somewhat lighter asset model, such as Sina: "Growth of the internet will be huge in China, and Sina is poised to capture a lot of the revenues from that growth. The Weibo microblog service they run will end up bigger than Twitter simply because there are more potential users in China than the US."
And Fools don't necessarily disagree. In fact, the three-star ratings on these stocks suggest that CAPS members are about evenly split on the odds that United Rentals and Sina will outperform the market from this point on. And they're even more enthusiastic about this week's top stock.
The bull case for National Oilwell Varco
National Oilwell has had a good run so far, but according to CAPS legend mrindependent, it's not done yet: "I think oil and gas still has room to rise for a few months or more. This pick looks good."
Fellow All-Star investor shredlee seconds that emotion, adding that according to management, "backlog will be increasing," which bodes well for revenue and profit growth going forward.
And more generally, CAPS member mitleg points out that National Oilwell has always been "the leader in their field" and adds: "With the ongoing turmoil in the middle east, and the upward pressure that the improving economy will put on oil prices it should continue to rise. [Its] forward growth is excellent."
Drilling for dollars
Brave words, but how do they hold up to examination? Well, it probably depends on how you define "excellent." According to analysts' consensus estimates, National Oilwell is due for 12.5% annual profit growth over the next five years. That's good … but not quite as good as the competition. Fellow oil-services companies Halliburton
And while it's true that National Oilwell sells for an apparent bargain price relative to the competition (possibly because it's expected to grow so much slower), I'd emphasize the word "apparent." Consider: With National Oilwell at 20 times earnings, you'd ordinarily want to see it growing at a Schlumberger-esque rate of 20% or more before calling the stock a bargain. Instead, the best National Oilwell seems able to muster is an anemic 12.5%.
Foolish final thought
And that's not the worst of it. Dig into the cash-flow statements at National Oilwell, and what you'll find is that reported GAAP earnings actually overstate the company's profitability. Free cash flow at National Oilwell, as it turns out, came to just $1.3 billion last year -- 21% below reported net income.
The result: I find it hard to imagine National Oilwell Varco's stock, at a valuation that already stretches past 26 times annual free cash flow, rising much higher. I won't go so far as to characterize the business as a dud, but the stock doesn't offer investors much bang for the buck.
Disagree? Feel free. If you have a different opinion of National Oilwell Varco, head over to Motley Fool CAPS now and tell us why.
National Oilwell Varco and Sina are Motley Fool Stock Advisor selections, and the Fool owns shares of Schlumberger, but 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. 541 out of more than 170,000 members. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Fool has a disclosure policy.