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 upward.

Problem is, if the price goes up too much, even a great company can turn into a lousy investment (and if the company was less than great in the first place ... ) Below I list a few stocks that may have done just this. Stocks that, according to the smart folks at finviz.com, have doubled (or nearly so) over the past year, and just might be ripe to fall back to earth.

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.

Question: What does Chinese gambling have to do with cancer research? What do either of these businesses have in common with gold mining? One answer might be that they're all "risky" endeavors, but more to the point, they're the businesses behind some of the hottest stocks on the market today.

Over the past 52 weeks, shares of Hong Kong-based Melco Crown have more than doubled in price. Ariad Pharma stock is closing in on a triple, while NovaGold has notched a 160% gain. But if you'll hold the applause for a moment, I submit to you that the question today is not how well have the stocks done in the past ... but whether they'll continue to perform in the future.

Surveying the 170,000-plus investors who make up the Motley Fool CAPS universe, we find members pessimistic about the prospects for NovaGold and Ariad, but decidedly optimistic about Melco Crown. Let's find out why.

The bull case for Melco Crown Entertainment
If you should never try to con a con, is it any safer to gamble on a gambler? CAPS member akbarcaskey678 admits: "Personally I am not a gambler, but others clearly are. As of right now the Chinese and other Asians have more disposable income than Americans so I feel the Macau will be booming for years to come ... I like MPEL better than the Las Vegas plays because this stock does not have enough attention as I feel it should. ... [MGM Resorts (NYSE: MGM) and Las Vegas Sands (NYSE: LVS)] are being covered by many analysts and talked about constantly on TV."

Speaking of which, CAPS member casinoexec notes that "if Melco shows improvement to it's profit margin this quarter, it will be positioned to perform better than it's U.S. competitors in Macau." (Wynn Resorts (Nasdaq: WYNN) joins MGM Resorts and Las Vegas Sands in the competition camp.)

CAPS member GettingtobeaGuru agrees: "Casinos are the best way to open up your own mint, short of starting a country. I like the book value, I also like the position to take advantage of a higher disposable income per capita in China."

So is this a gamble you should make? Is this a rocket with fuel still in its tank? I wish I could tell you I was certain it is (on both counts), but the sad fact is I'm not sure about either one.

Why not, especially when, in addition to the above arguments, my fellow Fool Travis Hoium just finished arguing that the power struggle at SJM will likely prove beneficial for Macau? Well for one thing, there simply aren't enough numbers to go on. About the kindest thing I can say about Melco's financial reporting is that it's spotty. Cash flow information is rarely disclosed in the company's financials, and what we do know about the company's profits is far from good. Melco Crown:

• Lost money over the past 12 months.
• Trades today at more than 93 times the amount of profit it's expected to make this year.
• Burned through nearly $2.8 billion worth of negative free cash flow from 2005 through 2009, and, judging from the (limited) cash flow information available, continued burning cash in 2010.

Time to chime in
These are just a few of the objections I have to investing in Melco Crown Entertainment today. For the rest of them, read this article. Then head over to Motley Fool CAPS and tell us whether you agree with me -- or with the majority -- about whether Melco Crown is a winning bet.