Get Ready for the Fall

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

Every day, Nasdaq.com publishes a list of stocks whose shares have just 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, since 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 105,000 stock gurus (and counting) in CAPS have to say about the list's latest contenders:

Companies are selected from the "NASDAQ 52 Week High" list published on Nasdaq.com on the Saturday following close of trading last week. Year-ago and recent prices provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

Which of these things is not like the others?
When stocks soar on the wings of success, bears become rare. True to form, four of the highfliers listed above score the maximum five stars allowed on CAPS. It seems that investors see energy prices going nowhere but up.

But the last stock on the list is another matter entirely. Engaged in building medical devices rather than in extracting hydrocarbons, Electro-Optical Sciences (EOS) gets no benefit from the oil boom. It also gets little attention from investors and not a lot of confidence. Let's find out why.

Build a bear, anyone?
This is a bit of a mystery. Over on CAPS, only 17 players have rated EOS, and 13 of those like the stock. The only pitch against EOS raises no substantive objections to the company; rather, it describes a short-term strategy of "shorting" certain types of small-cap stocks. In fact, one pro-EOS pitch concerns me more: Player wodeqian confides that "[o]ne of those crazy newsletters recommended it and so I want to see if it really will go to 50 like they say."

In short, if we want to know why EOS is a sell, we'll have to do much of the legwork ourselves. Fortunately, you don't need to walk very far to discover the problems with this stock.

Technically speaking, EOS operates in the same industry as such medical-products pioneers as Motley Fool Rule Breakers recommendations Mindray Medical (NYSE:MR) and Intuitive Surgical (NASDAQ:ISRG). But there the similarities end. Where our Rule Breakers picks have actual products, EOS, by its own admission, "is a medical device company focused on designing and developing a non-invasive, point-of-care instrument to assist in the early diagnosis of melanoma." (Emphasis added.) In other words, EOS is a research-and-development shop, which still has nothing to sell after nearly 20 years in business. The company has no revenue, lost nearly $12 million last year, and is burning cash at an accelerating rate.

EOS is at no risk of running out of cash this year, but neither does it appear capable of generating cash any time soon. Its $17 million in cash and securities comes primarily from the success of a highly dilutive private placement conducted last summer. Simply put, there's very little behind the ticker on this stock. EOS's three stars on CAPS is an overly generous rating.

Time to chime in
The aim of this column isn't just to tell you what I think about EOS -- or even what other CAPS players are saying. We want to hear your thoughts. Head on over to Motley Fool CAPS, and tell us what you think.

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