Rocket Stock or Dud?

"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.

Every day, WSJ.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 more than 130,000 stock gurus (and counting) in CAPS have to say about the list's latest contenders:

Five stars = highest possible CAPS rating; one star = lowest. Companies are selected from the "New Highs & Lows" lists published on WSJ.com on Thursday and Friday last week. One-year-ago and current pricing provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

Cavalcade of losers
Considering how well these stocks are performing, you may be surprised to see just how down investors are on them. It seems the only one that Fools favor at all is Hansen Natural -- a Motley Fool Rule Breakers recommendation, by the way. As for the rest ... well, it's a four-way tie for the CAPS booby prize of a one-star rating.

And yet, I'm not entirely certain that all of these stocks deserve to be consigned to the lowest circle of CAPS hell. AirTran and Isle of Capri, sure -- neither one of those seems capable of generating positive free cash flow with any consistency. California Pizza, likewise; while not a total basket case, its free cash flow is anemic at best. But P.F. Chang's?

Well, first let's let the bears have their say. Then I'll respond.

The bear case against P.F. Chang's China Bistro

• In early February, CAPS All-Star SuperPicks called P.F. Chang's an "overextended, overexpanded company whose earnings are likely to fall significantly the next few years, and consequently lead to a collapse of the current stock price due to valuation & already institutional ownership."
• Fellow All-Star bigpeach thinks P.F. Chang's is the pits -- but not because of "the current economic environment, or [P.F. Chang's] itself, rather it is an industry call. Restaurants are classic underperformers. Margins are too low and competition is too high."
• Similarly, SolarisKing has been "[s]horting several restaurants," including Buffalo Wild Wings (NASDAQ:BWLD), and Darden Restaurants (NYSE:DRI). Why? "The whole sector looks like folks have lost their minds. PE of 18 in a restaurant? in 09?"

Now, I've got nothing against making industry-wide predictions. I've made a few myself in the overvalued solar sector, arguing that last month's sudden run-ups in everyone from JA Solar (NASDAQ:JASO) to Suntech (NYSE:STP) to Yingli Green Energy were unsupported by fundamentals. That said, when I look over P.F. Chang's numbers, I just don't believe this chain deserves to be lumped in with the rest of the industry.
 
Take SolarisKing's amazement at the P/E, for example. On the one hand, things are even worse than the King believes -- P.F. Chang's sells for not 18 times earnings, but nearly 26. On the other hand, though, this P/E ratio is misleading because last year, P.F. Chang's generated free cash flow far in excess of what it is allowed to report as "net earnings" under GAAP.

Valued on its $52 million in trailing free cash flow, therefore, P.F. Chang's enterprise actually sells for only 16 times earnings. And relative to the 16% projected annualized five-year growth for the company, this price seems entirely reasonable to me. Long story short, I see no compelling reason for P.F. Chang's stock price to fall.

Time to chime in
Of course, the aim of this column isn't just to tell you what I think about P.F. Chang's -- or, for that matter, what our CAPS members think. What we really want is to convince you to write your own restaurant review. Does reading all of the above leave you hungry for the stock, or in MSG shock?

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