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 rocket stock just before it takes a nosedive.

Every day, WSJ.com 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 not always ...

Companies are selected from the "New Highs & Lows" lists published on WSJ.com on Thursday last week. 52-week low and recent price provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

"Everybody loves a winner"
After the Great Rebound of '09, a lot of famous names wound up in the winners' column last week. Famous names like Disney, Nike, HP, CarMax, and ... "Ceragon Networks"? Who invited these guys to the party?

The bull case for Ceragon Networks
CAPS All-Star and all-around good Fool TMFPlatoish introduced us to Ceragon in June as:

[A manufacturer of] radio systems for wireless backhaul of communications traffic. In places with significant wired infrastructure (fiber and TDM leased line), wireless backhaul is an economical adjunct to facilitate cell splitting and to add additional unplanned capacity necessitated by the explosion of data traffic as smart phones become ubiquitous. In "greenfield" deployments, many systems will use wireless backhaul almost exclusively. ... It is an Israeli company and it is small. Management to shareholder communication is above average for a foreign company and management doesn't shirk from describing problems/issues facing the business.

TMFPlatoish has a whole lot more to say about Ceragon, but I think that'll do for now.

Next in line is JRedhawk11, who urges us to do the math on Ceragon: "Great balance sheet + presence in major emerging markets + some sweet new contracts = a speculative tech pick with tremendous upside potential. I bought this stock when it was in the high 7's range and it has performed well since then..."

"Perfomed well?" I'll say! Through the topsy-turvy market that was 2009, Ceragon more than doubled its market cap. And although All-Star investor EnigmaDude thinks the "train has left the station ... its not too far down the line ..."

So what do you say, Fool? Should we grab our suitcase, chase this train, and attempt to board? Before you answer, let's pause and revisit TMFPlatoish's pitch (read all 17 volumes here). While in the main optimistic about the company, TMFPlatoish does caution us that "the big telecoms love to stretch out their payables (Ceragon's receivables), meaning that Ceragon's cash conversion cycle is longer than I would like to see." So a bet on Ceragon is in part a bet on the willingness of customers like AT&T (NYSE:T) and Verizon (NYSE:VZ) to pay their bills and create new ones.

Fortunately, things are improving in this regard. Although Ceragon's GAAP numbers tell us that profit plummeted last year, in fact, 2009 was the year in which Ceragon generated its first real profit. (Free cash flow, that is.) After years of burning cash, Ceragon's free cash flow reversed itself and turned positive last year. So maybe the company really is turning the corner ...

Foolish takeaway
Now, that's not to say that I would buy the stock. Even viewed in the most favorable light, that Ceragon generated $9.3 million in free cash flow over the first three months of 2009 suggests a run-rate of approximately $12.4 million for the year. But at a market cap north of $400 million, the stock still trades for 34 times free cash flow -- pricey for a company that most analysts believe will struggle to achieve even 15% annualized five-year growth.

Me, I'm inclined to set Ceragon aside, and keep looking for more of a "sure thing." But as its five-star rating demonstrates, I'm in the minority here. Clearly, a lot of Fools see a lot to like in Ceragon. If you are one of them, then here's your chance to climb aboard the Ceragon train and tell me why everyone else is right (and why I am wrong).

Sound off here, Fools.