Sometimes, stocks rise for a reason. But other times, investors get mired in a momentum mindset, 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.
CAPS Rating (out of 5):
Sunrise Senior Living
Companies are selected by screening for 100% and higher intraday price appreciation over the past 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.
Semiconductors, silver mining, and senior citizens. Aside from all beginning with the letter "s," these businesses don't have a lot in common -- except for one thing: Their stocks are some of the hottest on the market. Together, Cypress Semi, Endeavour Silver, and Sunrise Senior Living have gained more than 440 percentage points in value over the past 12 months and have outperformed the S&P 500 by an average of more than 120 percentage points each.
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 trishsym, as surely as the sun rises in the morning, you're going to make a profit from Sunrise. Why? Because "this market segment is only going to grow given the baby boomers and given the success so far." Our CAPS member continues: "Look at historical prices of SRZ before the recession and it's an indication of where it can go." CAPS member jkeesing is easily as optimistic about Endeavour, albeit for different reasons: "the price of silver … will remain in a longterm uptend due to the debt issues in Europe and the US along with an expanding Asian [production] & consumption economy. Silver goes to $70 [within] a year!!!"
Maybe, maybe not. And I'm not exactly sure I'd know a "longterm uptend" if I saw one. But I'm pretty good at reading charts, and what I see in the one up above is that a whole lot of investors appear to believe five-starred Cypress will outperform both three-starred Sunrise and Endeavour. But why?
The bull case for Cypress Semiconductor
Most CAPS members endorsing Cypress to date have tended to speak in glowing generalities. CAPS member empireruler calls the company "extremely strong." Milton5318 calls it "revolutionary," and MOTV8 proclaims "that tech is the new tech."
But a few Fools offer more specifics. For example, All-Star investor (and all-around good Fool) TMFBreakerJava says that Cypress "produces essential components used in smart phones" and adds that it's "positioned in the sweet spot for growth as this technology displaces standard cell phones throughout the world." CAPS member nosfool gets even more specific, telling us that Cypress is involved in "touch screens … and programmable chips," an area of tech in which "CY is well positioned."
But what about the numbers?
Good question. Tech may very well be "the new tech," and Cypress may well have a leading position in it. But before we buy the company, it's also necessary to confirm that Cypress knows how to make a buck off the newest smartphone gadgets.
Unfortunately, this is where the bull thesis on Cypress starts to run into trouble. Now, don't get me wrong -- I'm not a total bear on Cypress. When I see the company's 37 P/E ratio, I don't jump to the conclusion that the stock costs four times as much as Advanced Micro Devices
I get that.
But here's the thing: Even if you value Cypress on its beefy free cash flow, rather than on its less robust net income, the company still costs nearly 19 times the amount of cash it generates in a year. That's an awfully steep price to pay for a business that's expected to grow at only 13% per year over the next five years. Sure, 13% is faster than TI's purported 10% growth rate, but it's not significantly faster than the growth estimates for AMD, Intel, and Xilinx. And it's certainly not enough to justify such a large premium multiple to both earnings and free cash flow for Cypress' stock.
Time to chime in
As a result, even if I'm optimistic about the future for smartphones, touchscreens, and all the other things that Cypress does so well, I'm not at all optimistic about the stock itself. I say that, after more than doubling over the past year, Cypress' run is done. This rocket has run out of gas.
Disagree? Feel free. Head over to Motley Fool CAPS now, and tell me why I'm wrong.
Fool contributor Rich Smith does not own (or short) shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 516 out of more than 170,000 members.
The Motley Fool owns shares of Texas Instruments and owns shares of and has bought calls on Intel. Motley Fool newsletter services have recommended buying shares of Cypress Semiconductor and Intel, creating a diagonal call position in Intel, and shorting Xilinx.
We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.