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.
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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.
Lasers, liquid natural gas, tobacco -- their businesses may vary, but the companies named above have one thing in common: they've got some of the hottest stocks on the market. Together, they've gained more than 530 percentage points in value over the past 12 months … and outperformed the S&P 500 by 479%.
[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?
CAPS member Brurobin likes the potential at Star Scientific, which possesses a "breakthrough technology" for curing tobacco, which it says will eliminate all those nasty carcinogens. If he's right, Star could do some serious damage to the business models of tobacco czars Altria
Judging from the stocks' one- and two-star ratings on CAPS, however, their views are in the minority. More popular by far is the top stock on today's list: fiber laser-maker IPG Photonics. But why?
The bull case for IPG Photonics
707oxford likes IPG for two reasons. First, "Laser Fiber Optics is an emerging industry." Second, "IPGP is the clear leader with a majority of the market share and the best technology."
As Zippany explained late last year, "there is limitless demand for enabling technologies in broadband infrastructure [such as] fiber lasers which are a revolutionary step." And that's not all: "There are many medical applications waiting to be tapped and some industrial ones too."
Best of all, while IPG stock has performed admirably over the past year, it's recently gone on sale -- twice. Two times in as many weeks, IPG has suffered steep drops into the mid-60s range. At the time of the first drop, D0min0 pointed out that the stock had gotten 10% cheaper "for no good reason," giving investors a "good entry point."
IPG stock: A bright idea?
Indeed, when IPG reported earnings earlier this month, the worst thing fellow Fool Anders Bylund said about it was that IPG delivered results that were "merely great and not mindblowingly awesome." IPG beat on earnings. It beat on revenues. And it raised guidance. Regardless, inscrutable investors responded by selling off the stock en masse, even as they left rivals like Coherent
Were they wrong to punish IPG so severely? Actually, I don't believe they were. While the company's results were undeniably strong … they weren't nearly strong enough to justify this stock's price.
Consider: At 43 times trailing earnings, IPG already looks overvalued for the dividend-less, 24% grower that it is. But the situation's actually worse than it seems. You see, while its reported profits look good, IPG's free cash flow was less than half what it’d need to be to back up the company's GAAP numbers. Free cash flow for the past year came to less than $36 million, giving IPG a price-to-free cash flow ratio of 87.
Time to chime in
To me, IPG looks overvalued by a factor of three -- if not more. Obviously a lot of Fools disagree with me -- those on CAPS, and also those at the Fool's own Motley Fool Rule Breakers service, where IPG is an official recommendation. How do I explain the disconnect? Simple: Everyone else is wrong. I'm right -- IPG is overvalued.
Of course, if you think I am the one who's wrong, you're in good company. Add to the chorus of catcalls by telling us why you think IPG Photonics is a buy.
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. 441 out of more than 170,000 members.
The Fool owns shares of Altria Group, IPG Photonics, and Philip Morris International. Motley Fool newsletter services have recommended IPG Photonics and Philip Morris International. 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.