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 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 not always...

Companies are selected from the "New Highs & Lows" lists published on WSJ.com on Friday last week. 52-week low and recent price provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

Knives and knaves
In almost every case (and with one notable exception), investors fear these stocks have gotten far ahead of themselves. Whether they're selling smartphones in a crowded market, hawking travel services in a recession, generating energy from thin air, or curing cancer, Fools may applaud the companies' intentions -- but they shudder at their lack of profits over the last four quarters.

And then there's VanceInfo.

The bull case for VanceInfo Technologies
CAPS All-Star pgcyf2007 introduced us to VanceInfo last summer as "the first IT Outsourcing company listed in USA Stock Markets." (Note: I think our member meant "Chinese IT outsourcing company.") The pitch continues:

Chinese Government has promoted several large Outsourcing Centers in the main Cities of China including Dalian, Wuhan .... Chinese internal market ... moving to IT Outsourcing strategies quite fast ... its main clients are Microsoft [ (NASDAQ:MSFT)], IBM [ (NYSE:IBM)] ... and there is a strategy to diversify by clients and markets (national and foreign). 

That was a pretty lengthy intro, but I'll give you three guesses which two words investors will latch onto. As V1gnesh says: "China + IT. It's a race against dominant Indian firms who're facing a loss of business due to forex issues and rising HR costs."

JonnyB2 thinks this race will be a long one -- happily for VanceInfo:

[A]ppears to have very large growth forcast. More and more companies are outsourcing and they want the cheapest product for cost, like any company would. [VanceInfo] will be a very good competitor to India.

Such growth prospects don't come cheap. VanceInfo may be the only profitable firm on today's list of Wall Street highfliers, but its stock is reaching even greater altitudes, with a P/E last sighted north of 36. Still, its earnings are growing no less quickly.

Last year, VanceInfo reported more than $16 million in profit, a 69% increase year over year. And while analysts don't expect VanceInfo to maintain that breakneck pace much longer, they do seem to think that it can maintain a 28% rate of annual profit growth for a half-decade or so. Oh, and did I mention it's doing all this with no debt whatsoever? In fact, VanceInfo boasts a $79 million cash balance.

Mind you, it's not all good news here. For one thing, VanceInfo isn't yet generating free cash flow on par with its GAAP earnings. For another, its profit margins don't quite measure up to what some of the Indian outsourcers earn. (Tata Consultancy, for example, has a couple-percentage-point lead over VanceInfo, while Infosys's (NASDAQ:INFY) margin is much larger.) Still, the profit margin as it stands is more than respectable, the balance sheet strong, and the growth rate impressive.

Time to chime in
Personally, I see every likelihood that VanceInfo will maintain its momentum and continue to outperform the market. But if you think the multiple is just a little too steep to buy into this story, I couldn't blame you. (In fact, I'd prefer a larger margin of safety myself before investing any cash in this one.)

Whichever way you come down on the stock, though, we'd love to hear your thoughts. Is now the time to get in on the ground floor of a new "Chinese Infosys" -- or is this elevator going down? Click on over to Motley Fool CAPS now, and place your bets.