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 hot stock just before it takes a nosedive.

Every day, MSN Money 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 what should you do when some of CAPS' smartest investors pan one of these hot stocks?

For starters, consider using the list of 52-week highs as a starting point for further research. Stocks can rise for many reasons, but a little help from Motley Fool CAPS can make it easier to figure out how worthy those reasons are. Let's see what the more than 115,000 stock gurus (and counting) in CAPS have to say about the list's latest contenders:

Companies are selected from the "New 52-Week Highs" list published on MSN Money on the Saturday following close of trading last week. One year ago and recent prices provided by Yahoo! Finance.

"Everybody loves a winner"
Well, maybe not everybody. A couple of the stocks hitting their highs of the year get above-average marks from the CAPS community this week. But there's no two ways about it -- the rest don't.

Now don't get me wrong; people don't actually hate Herley Industries, XTL Biopharma, or Alliance Imaging. In fact, each of these companies gets four times as many "yea" votes as "nays" on CAPS. As pessimism goes, the sentiment against these firms looks pretty weak. That said, the aim of this column is to quality-check the optimists -- to take a good hard look at the best shots CAPS members can throw at these companies, and see how well the stocks withstand the hit.

It's for this reason that Alliance Imaging falls into our crosshairs this week. It's the only one of the below-average-rated stocks that has even a single "pitch" penned against it. Without further ado, here it is:

The bear case against Alliance Imaging
An army of one, SwingLong carries the bear standard against Alliance Imaging. In a late-July argument long on numbers and short on prose, SwingLong focuses on Alliance's high price, low profit margin, and high debt relative to the industry it operates in: "[Alliance Imaging] vs Industry (Medical Labs and Research) ... P/E: 33.81 v 28 ... LT Debt/Eq: 94.01(!!!) v 2.92 ... Net Prof Margin: 2.3% v 6.7% ... The only thing this company seems to have going for it is decent cash flow."

Two out of three ... Alliance ain't bad
In reviewing the latest numbers, I have to say that in this Fool's view, SwingLong is only half right. Yes, the P/E is high -- it's up to 42 at last count. Yes, the debt load is hefty, too, but it's nowhere near 94. Alliance is really carrying a D/E ratio of "only" about 40. (Which is still really high.)

On balance, though, I actually think Alliance has more pluses than minuses. For one thing, it generates enough cash to slowly but surely pay down its debt. For another, the profit margin is up to 3.1% at last count. For a third, the admittedly high P/E ratio looks misleading to me. 

You see, Alliance generated $69.5 million in free cash flow over the past 12 months, giving it a seemingly cheap 8.5 price-to-free cash flow ratio. Add in the debt, and the enterprise value-to-free cash flow ratio rises to 17.9. But even that number doesn't look unreasonable based on analyst estimates of 13.5% earnings growth. 

And to be honest, I don't see any reason why Alliance would not grow. As years pass, our aging population will only need more of the MRI, PET, and CT scans that Alliance provides. Sure, the machines Alliance buys from GE's (NYSE:GE) and Siemens' (NYSE:SI) health-care divisions cost a bundle, but I'm pretty sure they'll see years of profitable use. 

Foolish takeaway
I'm no great fan of investing in single-digit profitability -- or heavy debt loads, either. But based on the cash generation I see here -- and that SwingLong noticed as well -- I see no reason that Alliance Imaging must fall. 

Time to chime in
Or maybe I'm wrong. If you've got a bear argument to make against Alliance Imaging, now's your chance. Come on over to CAPS and tell us what you think.

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