Which Stock Falls First?

"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, finviz.com publishes a list of stocks whose shares have just hit new 52-week highs. Every day, investors read the list and tremble -- some with greed, others with terror. Within our Motley Fool CAPS investing community, these top stocks generally enjoy favorable ratings, since everyone loves a winner … but not always:

Companies selected by screening for new 52-week highs hit on the Thursday before publication. Low and recent price provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

When a stock hits a new 52-week high, it's only natural to wonder whether "this time" is "the last time" -- whether there's nowhere left to go but down? And really, because no company is perfect, there's always at least a chance that will happen.

Fact is, if you look hard enough, you can find a flaw in any stock. For example …

• Abbott Labs is laden with $13.5 billion in net debt, and boasts a below-industry-average growth rate of less than 9%.
• Kinder Morgan carries $11.5 billion in net debt and is supposed to be growing at only 7% Judging from it having posted three earnings misses in the past four quarters, it may fail to hit even this growth target.
• At 25 times earnings, Yum! costs more than McDonald's (NYSE: MCD) but pays a smaller dividend yield (a mere 2%.) It also looks expensive relative to its 14% projected profit growth.
• And like Yum!, Halliburton cost 25 times earnings -- while paying an even stingier dividend yield (barely 0.7%).

And yet, Fools on balance still find more positives than negatives at these companies, each of which enjoys an above-average four- or five-star rating on CAPS. As it turns out, the only stock making today's list that fails to win support from Foolish investors is … the one that's won an official recommendation from Motley Fool Rule Breakers. But why do so many investors dislike lululemon so very much? Let's find out.

The bear case against lululemon
CAPS member Coyotemark sums up the emotional reaction to lululemon's rise thusly: "Very Very Overpriced! Going high too fast!"

Seconding the emotion, but with tongue planted firmly in cheek, Foolish value investor  TMFTenacious muses that "every American [would have] to do 10 hours of yoga a day" (and buy the clothing to support such a lifestyle) in order to justify lululemon's valuation of 10 times annual sales.

And while I agree the company's products look nice, CAPS All-Star apismellifera warns: "I don't care how nice a leotard they make; high fliers like LULU crash fast when the macroeconomic double dip kicks in."

I agree. At 60 times earnings, lululemon looks 20% more expensive than it appeared when I gave it grudging approval last year. Free cash flow remains impressive, true. But even so, the stock's trading for close to 50 times the amount of cash it generates in a year -- pretty pricey, even for a company that most analysts expect to grow at a 25% clip over the next five years.

Time to chime in
Granted, lululemon is not the most expensive stock in the world. Fellow athletic flyer Under Armour (NYSE: UA) has a near-60 P/E, too, but generates less than a third as much free cash flow as its GAAP financials suggest, and appears even more overvalued than lululemon.

But just because there are stocks out there that cost more than lululemon doesn't change the fact that lululemon itself looks pretty pricey today. My advice: If you've made profit on the stock already, count yourself lucky, but don't push your luck. High-flying stocks are the ones with the furthest to fall -- and lululemon could be a doozy.

Or at least, that's my opinion. What's yours?