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.
(out of 5)
Chipotle Mexican Grill
Companies are selected by screening for 100% and higher intraday price appreciation over the last 12 months on finviz.com. Five stars = highest possible CAPS rating; one star = lowest. Current pricing provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.
Solar cell manufacturing, cardiovascular research, and ... burrito assembly -- 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, these stocks have gained a combined 800 percentage points in value over the past 12 months -- and outperformed the S&P 500 by 732%.
[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?
According to CAPS member dniggl, Chipotle has discovered the key to long-term success in three parts: "Healthy food, quick service, reasonable price." Meanwhile, CAPS member Tappercoon offers a less obvious pick: "Amarin will file for approval in Q3. ... and [has], more importantly, ... a strong chance of buyout by big pharma (like [GlaxoSmithKline] so not to lose the huge market since Amarin's is a better drug), Amarin will continue to outperform the market as investors/traders stay with the stock for another big pay-out date."
Of course, based on the stocks' two-star ratings on CAPS, it seems their views are in the minority. More popular by far is the top stock on today's list: GT Solar. But why?
The bull case for GT Solar
Take your pick. CAPS member momotrader12 lays out a plethora of reasons to prefer GT Solar:
GT Solar is one of the main suppliers of clean-energy technology to solar-panel makers ... the company has a very low P/E ratio. There is a rising backlog and it has great free cash flow. There is reasonable downside protection afforded by low P/E ratios and potentially solid upside, due to projected earnings momentum.
And while there are almost too many companies to count that are playing in the solar sandbox, 94impala thinks GT stands to win no matter what, because it sells its products to "numerous other solar companies." As such, it doesn't really matter whether of whether Trina Solar
And right on cue, jdavis4982 tells us that GT "just signed two contracts ... playing in two diverse, high-growth fields. Also, even though both orders are from Asia, one is from Taiwan (as opposed to China).
Sound good so far? Well, just wait. It gets better: Not only does GT occupy the "can't lose" position of arms merchant in the middle of a solar arms race (or selling shovels to goldminers -- pick your favorite metaphor). It's also inexplicably cheap. The stock costs only 11 times earnings today and just over 6 times free cash flow. Meanwhile, Wall Street analysts have GT pegged for 14% annual profits growth over the next five years.
To top it all off, GT is even cheaper than it looks. The company's sitting on nearly $200 million in net cash, meaning that if you ex-out this cash, GT's P/E and P/FCF ratios would actually be lower than they already look.
Time to chime in
To me, this makes GT Solar look very attractive for investment at today's prices. It gets me to thinking this rocket stock just may have more fuel in the tank -- but that's just my opinion. What we'd really like to know is what you think about GT Solar.
Click over to Motley Fool CAPS now, and let us know if you agree.