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.

Now I readily admit that sometimes, stocks rise for a reason. But sometimes, the rise becomes the reason. No matter how often we caution them not to, investors do have a habit of buying "hot" stocks and trusting momentum to keep 'em moving upwards.

Problem is, if the price goes up too much, even a great company can turn into a lousy investment. Below I list a few stocks that may have done just that. Stocks that, according to the smart folks at finviz.com, have experienced sharp rises in price over the past three months and just might be ripe to fall back to earth.

Companies are selected by screening for 50% and higher price appreciation over the past quarter on finviz.com. Five stars = highest possible CAPS rating; one star = lowest. Current pricing provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

Each of these stocks has enjoyed remarkable gains over the few months, no doubt. But if you ask the 135,000 (and counting) investors who make up Motley Fool CAPS, not all of these companies deserve their sudden gains.

Fools seem particularly worried about the perpetually parlous state of affairs in banking. While the debate rages as to whether the Bailout was Great or Terrible, the verdict on the banks who benefited is in: We're not impressed. Any gains that were to be had, have already been had, and the sector's unlikely to outperform going forward.

So where shall we seek for the gains that remain? Look eastward Fool, as we examine ...

The bull case for Vimpel-Communications
In March CAPS All-Star Trimalerus called this Russian cell phone magnate "a good buy as the telecommunication market in Russia is still in it's infancy and this company is well positioned for growth." And rasn agrees that Vimpelcom is "[l]ocated in a growth area and with relatively low competition."

But just who is that competition? Well, there's Motley Fool Global Gains recommendation Turkcell (NYSE:TKC) of course; also Telenor, Rostelecom, and Svyazinvest. But according to michaeltbryant, Vimpelcom outclasses all these comers, and is "[s]econd to [Mobile Telesystems (NYSE:MBT)]." What's more, while Vimpelcom is only No. 2 at home, it's also taking its game on the road and "expanding into southeast Asia." (Namely, to Cambodia and Vietnam.)

Now I know what you're thinking -- maybe Vimpelcom is all these things, but isn't it also losing money?

Well, yes and no. On the one hand, it's true that Vimpelcom took some goodwill writedowns at the end of 2008, and has also suffered mightily from a devaluing Russian ruble. As a result, the stock has no P/E because it has no "profit" (as GAAP defines the term). But Vimpelcom does have free cash flow. Lots of it.

Fact is, Vimpelcom generated $1.8 billion in free cash flow over the past 12 months -- roughly the same amount it generated in 2007, which was before the global economic crisis hit. Based on these results, the stock is selling for less than 7 times free cash flow. Even with its slug of debt, the enterprise value-to-free cash flow ratio still comes in around 11. For a company that most analysts seem to think will grow at about 8% or so over the long term, that price looks fair to me -- and maybe even cheap.

Time to chime in
But perhaps you disagree? Nothing wrong with that, Fool. You see, the aim of this column isn't just to tell you what I think about Vimpel-Communications -- or even what other CAPS players are saying. We really want to hear your thoughts. Click on over to Motley Fool CAPS and tell us what you think.

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