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 more than doubled since the beginning of this year, and just might be ripe to fall back to earth.

Companies are selected by screening for 100% and higher price appreciation year-to-date 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 reaped huge rewards this year, with the biotech sector in particular enjoying a remarkable resurgence. But if you ask the 140,000 investors (and counting) who occupy the judges' stands on Motley Fool CAPS, it's time to get out while the getting's still good.

Case in point: Of the four biotechs on today's list, most receive marks far below average. Meanwhile, the odd man out this week, Joy Global, although recipient of the full five-star treatment, seems to me unworthy of that honor ...

But before I explain my objections to the stock, let's give the bulls a chance to state their case:

The bull case for Joy Global
CAPS member brice7698007 starts us off with the bull thesis, tongue planted firmly in cheek, calling Joy "an arms dealer of sorts, supplying the tools to the companies that tear up the earth, to satisfy our endlessly voracious appetite for habitat destruction. ... in any case, nicely run business ... & should do nicely going forward. think of all the money you'll make. don't think on all the poor little cuddly squirrels, chipmunk, deer, and three-toed sloths who used to live in the forest that was bulldozed to make your suburban home, and now have no place of their own."

Of course, Joy is more closely associated with the tools used to mine coal than with those used to build skyscrapers from which to defenestrate wildlife. Knowing this, kab1952 points out: "Coal like uranium will be mined and will be hot once this R thing is over with with. Joy is a major player in suppling the machinery & equipment required to mine the coal." Which brings us to our final observation, courtesy of msbob7: "China is using coal like no tomorrow. They are deep in the Industrial Age."

Perhaps that's why Joy Global has done so well this year. In contrast to more diversified manufacturers like Caterpillar (NYSE:CAT), players such as Joy Global (and archrival Bucyrus (NASDAQ:BUCY)) aim squarely at the mining industry that feeds industry in China and other fast-developing markets. But China's insatiable appetites notwithstanding, the question remains: Now that Joy has already doubled, is there any room for it to rise further?

Short answer: No
Oh, I know what you're thinking. With a stock priced at merely 11 times earnings, and a history of growing its earnings at an astounding 54% per year compounded over the last half-decade, how can Joy Global not be a buy? But the answer is simple: Joy Global has topped out. It's had a great run, true, but it's too expensive today. (Yes, even at a P/E of 11.)

You see, the past growth is great and all, but going forward, analysts today think that Joy will grow at only about an 8% pace. That's too slow to justify an 11 P/E -- and it gets worse.

Turns out, even the bumper crop of profit that Joy is currently, er, enjoying, isn't all it's cracked up to be. Examine the firm's cash flow, and you'll see that in the last four quarters only 81% of this firm's reported "net earnings" under GAAP are backed by actual free cash flow. With free cash so weak, Joy's stock is actually trading for more than 13 times its annual free cash flow. (Incidentally, were this not the case, it's unlikely we'd see Joy's balance sheet loaded down with more than $280 million in net debt.)

Time to chime in
Fools, I take no joy (no pun intended) in nixing this company today. Truth is, this company has done a superb job of rewarding its shareholders in years past. But all good things come to an end, and this company's stock price has simply gotten ahead of its prospects as a business. The time has come to cash out, count your winnings, and find a better prospect.

Or not. Here at Motley Fool CAPS, dissent isn't just welcomed -- it's encouraged. If you've got a theory for why Joy Global remains a buy, here's your chance to tell the world about it. Click over to the site right now, and tell me why I'm wrong.