Sometimes, stocks rise for a reason. But other times, investors get mired in a momentum mind-set, and that rise becomes the reason. Sadly, even a great company can turn into a lousy investment if its price reaches too great an altitude -- and a shaky company can become an outright disaster.
Below, I list a few stocks that may have flown too close to the sun. According to the smart folks at finviz.com, these companies shares have nearly or entirely doubled over the past year, leaving them potentially poised to fall back to earth.
The Medicines Company
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.
Working in fields ranging from pharmaceuticals to hotel reservations to video streaming, the companies named above are some of the hottest stocks on the market. Together, they've gained more than 400 percentage points in value over the past 12 months, and outperformed the S&P 500 by 340%.
[Pause for applause.]
Each of these stocks has done well over the past year, but which one will do best for the rest of 2011?
Arguing that "streaming is the next generation and Netflix is patiently adding to their libraries and will continue to lead the space," All-Star investor Capsperson is betting the erstwhile DVD-by-mail superstar will keep shining bright.
Meanwhile, CAPS member livinglearning prefers Priceline. Why? "They have proven themselves over and over again even when the 'experts' were doubting them. I think some are still doubting them. That's just fine with me ... They have great management and all they do is beat expectations year in and year out."
And as you know, we love both companies here at the Fool, where both Netflix and Priceline are active Motley Fool Stock Advisor recommendations (and have been for years.) Regardless, neither one tops this week's list of rocket stocks. That honor goes to the curiously named company ...
The Medicines Co.
I'll give you three guesses what "The Medicines Co." does -- although I doubt you'll need more than one. Way back in 2006, CAPS member walchak highlighted this "Little Pharma" operator as a potential big winner, on the theory that "their primary anticoagulant medicine is being used increasingly in the cardiology community for increased safety considerations and their next medicine in the pipeline may be even bigger."
CAPS member medsmall think the investment thesis remains intact today as well: "Price/earnings of 8.28, market cap of 866.36, debt/equity of zero, Return on Invested Capital (TTM) of 35.00, based in New Jersey, United States, pharma company with focus on critical care patients." And Medicines is growing, too. HardnoseDotCom likes the stock for its "low PEG, strong price uptrend."
A below-the-radar rocketship
Despite all this, Medicines Co. still flies below the radar of most investors. Up on Wall Street, a bare half dozen analysts track it -- versus the legions who devote their time to pharma giants like Pfizer
Well, for one thing, it's not easy analyzing Medicines. "Lumpy" doesn't begin to describe the strangeness of this company's financials. For example, you know how medsmall and HardnoseDotCom were talking about the company's low P/E? That's a pretty recent development. Last year, Medicines earned $105 million from its business, but prior to that, the company three-in-a-row money-losing years. Free cash flow-wise, it's also often feast or famine. In 2010, Medicines raked in more than $67 million in "cash profits," but the year before -- it barely broke even. I don't envy the Wall Street analyst tasked with predicting where Medicines might go in any future year ...
That said, long-term, the stock does look intriguing. Lumpy its earnings might be, but over the past five years Medicines has averaged better than $30 million in annual free cash flow. And in a world where Pfizer and Merck are looking at low-single-digit profits growth for the foreseeable future, and Lilly and Bristol-Myers are pegged for negative earnings growth, Wall Street thinks Medicines will grow at a rate of 35% per year for the next five years.
Time to chime in
That's pretty incredible growth, Fool. And whether you think of Medicines as a "7 P/E company," one trading for "12x forward earnings," or even "28x average free cash flow," it's almost certainly fast enough growth to make this stock a bargain -- and ensure many future years of market trouncing outperformance.
Or so say I. But what do you think? Tell us on Motley Fool CAPS.