Editor's note: An earlier version of this article failed to account for a 3:2 split in shares of Flowers Foods. The article has been updated. The Fool regrets the error.

"The bigger they are, the harder they fall." It's the worst nightmare of every investor in today's market -- buying a hot stock right before it takes a nosedive.

Every day, Nasdaq.com publishes a list of stocks whose shares have hit new 52-week highs. And every day, investors read the list and tremble -- some with greed, others with terror. On our Motley Fool CAPS investing community, these top stocks usually enjoy favorable ratings because everyone loves a winner. But what should you do when some of CAPS' smartest investors pan one of these hot stocks?

For starters, consider using the 52-week-high list as a starting point for further research. Stocks can rise for many reasons, but a little help from Motley Fool CAPS can make it easier to figure out how worthy those reasons are. Let's see what the more than 83,000 (and counting) stock gurus in CAPS have to say about the list's latest contenders:

One Year Ago

Currently Fetching

CAPS Rating
(5 Max)

Flowers Foods  (NYSE: FLO)

$19.69

$25.26

*****

Chattem  (Nasdaq: CHTT)

$57.59

$79.73

****

Raytheon (NYSE: RTN)

$54.85

$66.09

****

Interactive Brokers Group (Nasdaq: IBKR)

$30.01*

$35.47

****

First Merchants (Nasdaq: FRME)

$26.24

$27.71

*

Companies are selected from the "NASDAQ 52 Week High" list published on Nasdaq.com on the Saturday following close of trading last week. One year ago and current pricing provided by Yahoo! Finance, as of the same date. CAPS ratings from Motley Fool CAPS.
*Interactive Brokers Group IPO'ed on May 3, 2007, at an offer price of $30.01.

Everybody loves a winner
When stocks soar on the wings of success, bears become rare. When they soar in the midst of a bear market, that only increases investor loyalty, so it comes as no surprise that most of the stocks on today's list enjoy above-average ratings from the CAPS community. In fact, only one company on today's list enjoys below-average marks. Better sit down for this, 'cause I know you'll be surprised to learn that it's a bank.

Shocker, I know. But let's suspend judgment for a moment and see if there's good reason for investors to shun First Merchants.

The bear case against First Merchants
At first glance, First Merchants' one-star rating does come as a surprise. After all, this Muncie, Ind., holding company (in addition to owning banks, First Merchants also runs an insurance company and owns a majority interest in a title insurer) just finished reporting 21% earnings growth two weeks ago -- no mean feat in a bear market.

In spite of that, of the 17 CAPS players who've weighed in on the stock, fully 15 of them think that First Merchants is bound to underperform the market going forward.

Only one player so far has gone on record as to why he's bearish on the stock. Fortunately, that sole brave Fool is CAPS standout and All-Star player tenmiles, who a few days ago, called First Merchants a "[g]ood little bank that is trading like it might catch a takeover bid. Absent that, it does seem fully valued here at $27.67 - technicals suggest retracement to $22-$23 range likely within next two quarters - bettin' on the short side after its recent run."

To which I'd reply, "I agree with everything but the part about First Merchants being a 'good ... bank.'" It may be "little" -- just a fraction of the size of fellow Midwesterners US Bancorp (NYSE: USB) and Fifth Third Bancorp (Nasdaq: FITB). But according to my bank-investing cheat-sheet, condensed from several years of reading the writings of Fools who know (better than I) how to invest in banks, the three key metrics you want to see in a good small bank are:

  • ROE > 20%
  • ROA > 1.5% approaching 2%
  • P/Tangible book < 2.0 is good, but rare with a good bank.

First Merchants misses on all three metrics. The return on equity, return on assets, and price-to-tangible book tests are all wide of the mark -- 9.5%, 0.9%, and 2.4 respectively.

To me, that makes First Merchant at best a so-so banking play, selling for a slight premium to the P/E valuations of its Midwest regional banking brethren. My guess, therefore, is that tenmiles will be proven right on this one, and that First Merchants is ready to fall.

Time to chime in
Of course, the aim of this column isn't just to tell you what I think about First Merchants -- or even what other CAPS players are saying. We really want to hear your thoughts. Is First Merchants first among banking stocks, or will it get dragged down with everyone else in the carnage that is America's financial sector? Click on over to Motley Fool CAPS and tell us what you think.

Motley Fool CAPS: It's fun, it's free, and it just might make you famous.

Fool contributor Rich Smith does not own shares of any company named above. US Bancorp is an Income Investor recommendation. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 399 out of more than 83,000 players. The Fool has a disclosure policy.