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. In our Motley Fool CAPS investing community, these top stocks usually enjoy favorable ratings, because 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 "52 week high" list 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 latest contenders from the list:

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

Everybody loves a winner
When stocks soar on the wings of success, bears become rare. So I guess it should come as no surprise that four of the five stocks listed above, in addition to climbing to 52-week highs, also rank highly in the estimation of the CAPS community. Why, we like 'em so much ourselves that both of the top two are Motley Fool Hidden Gems picks.

But then there's Woodmark. How did that one slip in?

Fools clearly don't believe that Woodmark deserves a place at this table. All by itself, that single, solitary CAPS star speaks volumes. But hey, let's let our Fools speak for themselves, as they describe ... 

The bear case against American Woodmark
AppleCity introduced us to Woodmark last summer. 

American Woodmark is one of the major suppliers of kitchen cabinets to both Lowe's (NYSE:LOW) and Home Depot (NYSE:HD). With both of these stores having lower sales and margins, pressure will be put on companies like [American Woodmark] and Kraftmaid to be more competitive in sales. [American Woodwork] has been increasing its use of imported products like drawers and hardware to keep pace in this market. Import cabinet companies with assembly in the US will cause more competition from abroad. This double edge sword will cause this stock to under-perform in the next few years.

Moving on, one of the great things about CAPS is that with 115,000 investors and counting, we're bound to have a few contributors who can offer firsthand experience with the companies they recommend. See if you think our next two pitchers qualify:

• Raising the workers' standard high, starsnsky declaims: "Upper management ensures themselves the perks and bonuses while the underpaid clerks receive 15 to 25 cents an hour pay raise. ... The company operates with the attitude of the backward, patriarchial 19th century generation. Get with the program, American Woodmark, and use your brain bank in the older employees who are still loyal to the company."
• woodmark (hint, hint) wondered aloud in March: "how can anyone buy this stock when the housing market is in the tank! i know for a fact that they closed one of their plants, because they dont have enough orders to keep their employees working full weeks."

As for myself, well, I've followed American Woodmark for years. These guys' cabinets line my kitchen walls. They're sort of a hometown hero to Fools living in Northern Virginia.

And then there's the underdog factor. No one wants Woodmark to succeed more than I do. No one's rooting louder ... and I dare say, no one's been more sorely disappointed at Woodmark's abject failure to come to grips with the scale of the housing downturn. Comments in management's latest conference call with analysts suggested the company is using just 50% of its manufacturing capacity, yet I've seen little sign that it is (successfully) seeking out new sales avenues independent of Home Depot and Lowe's, reducing capacity, or otherwise committed to getting its costs in line with what business remains.

Foolish takeaway
Until it does, I'm afraid Woodmark is what it is: a cabinetmaker in a housing downturn, sporting a negative trailing P/E and growth prospects no greater than 7% per year over the long term.

So if you ask me: "Is Woodmark due for a fall?" I can only answer: "Yeah, verily."

Time to chime in
Or am I being too pessimistic? Few on CAPS seem to think so, but if you know better, please clue us in.