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 (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 have more than doubled over the past year, and just might be ripe to fall back to earth.

Companies are selected by screening for 100% and higher price appreciation over the last 12 months. Five stars = highest possible CAPS rating, one star = lowest. Current pricing provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

Ring, ring. Should I answer that?
We begin today's story with Vonage: Internet telephony pioneer, the (almost) last man standing in the industry. A company founded for the purpose of releasing consumers from the tyranny of near-monopoly service by Baby Bells AT&T (NYSE: T), Verizon (NYSE: VZ), and siblings. We all know how Vonage's rivals responded to its challenge -- lowering the cost of their services, bundling 'em with services Vonage doesn't offer, and even trying to sue the company out of existence. Despite it all, Vonage has persevered, turning profitable and even doubling its profit last quarter.

zendogfool expects Vonage to continue its winning ways, and believes the run-up in share price has merit: "Given recent developments of the Vonage app being added to iPhone, Skype going to Verizon, I expect [Vonage] will be bought out by AT&T, Apple, Google or the like within the next year."

In contrast, with UAL Corp, it's them doing the buying -- and promising to squeeze $1 billion in extra profits out of an announced merger with Continental. Examining the stock, CAPS member cw33wc thinks a billion in extra loot should be enough to "drive it up," and rates UAL an outperformer for that reason.

And yet, the fact remains that these two optimists are very much the exception. Judging from the stocks' one-star ratings, it seems most Fools don't expect to see very much at all out of Vonage or UAL Corp. Most investors, it would appear, think these stocks are duds. But not so with Innophos.

The bull case for Innophos
Never heard of Innophos? CAPS member JPNot can help you out with that:

[Innophos] produces and sells specialty phosphates primarily in North America. Their phosphate can be found in, or are used for: beverages, cheeses, baked goods, vitamins, toothpastes, asphalt, water treatment, cleaning products, clay processing, copper ore processing, and lastly fertilizers among others. Now that's diversification! ... [T]hey are subject to volatile raw material costs and selling prices of phosphate. But with a 40% market share, I can live with the short term volatility of the stock.

Its dominance in the phosphate market notwithstanding, sallyparkinson tells us that the company remains: "a sleeper stock in an industry which has alot of potential for furure success!"

And going hand in hand with its lack of name recognition, milanoluca recently noted that Innophos sports a "low P/E, good dividend." By way of comparison, higher-profile phosphates rival PotashCorp (NYSE: POT) sells for a P/E twice that of Innophos, while having a dividend yield of just one sixth the size of Innophos's. Mosaic (NYSE: MOS) sells for an even higher P/E, while paying the same 0.4% yield you'll find at Potash.

All the trappings of success
So, dominant market share, low price, and flying below the radar. On the other hand, it's not all good news for Innophos. When the company chimed in with first-quarter earnings last week, it reported an 11% sales slide, and a two-thirds decline in quarterly earnings. CEO Randy Gress says he's seeing "encouraging ongoing volume growth," and the company predicted "strong cashflow generation ... overall for the year."

... with one caveat
But the company also warned that capital spending will be in the neighborhood of $35 million this year -- significantly higher than historical norms. If cashflow doesn't strengthen appreciably (free cash flow over the past year is running at about $72 million), the company's valuation could become problematic as the year progresses -- especially with analysts predicting that long-term earnings growth at the company will approximate only 5%.

Foolish takeaway
All this suggests to me that after running up so strongly since its lows of last spring, Innophos is no longer "cheap." Sure, its P/E may look attractive relative to the higher valuations on Potash and Mosaic. But if free cash flow should tumble this year, and if Innophos remains stuck at 5% growth for years to come, this stock could well turn out to be a dud of an investment.

My call: Innophos has had its run. Seek your bargains elsewhere.

Of course, that's just my opinion. If you think this rocket stock's got more fuel to burn, click over to CAPS now, and tell us why.