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 on finviz.com. Five stars = highest possible CAPS rating; one star = lowest. Current pricing provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

Tech's back, baby ...
... and with a vengeance. While the market's recent hissy fit may have raised doubts about the broadness and duration of the bull market's run, it's hard to call the gains at these three companies anything other than phenomenal. And the result: Atheros -- up more than double. Intuitive Surgical -- up 130%. Netflix -- 188%! And all in the space of a single year.

But are there more gains in store? Perhaps. Calling himself a "loyal customer" of Netflix's "disc rental business," CAPS member zenodux testifies firsthand to: "The fairness, ease, power, and affordability of the rental system" that has "allowed them to build their brand at the expense of [Blockbuster (NYSE: BBI)] and movie disc retailers," making Netflix "fully prepared for the present and poised for the future."

CAPS member KKCCMF has similarly glowing things to say about Intuitive Surgical's "Strong business model," and sees a similarly bright future as hospitals continue "purchasing multiple daVinci systems," leading to both "International growth" and "Domestic growth into multiple specialties."

And yet, the consensus opinion about these two stocks remains muted on CAPS. Perhaps victimized by its own run-up in price, Netflix now scores an uninspiring two stars. Meanwhile, Intuitive -- recently called out, and not for the best, in The Wall Street Journal -- fares hardly better with a mediocre three-star rating. But don't lose hope, Fools. According to our 165,000 (and counting) CAPS stock analysts, Atheros' run has only just begun. 

The bull case for Atheros Communications
What is Atheros' secret? CAPS member larryknows says: "They are the leader in this wireless technology and everyone would like to eliminate the bundle of wires they have."

More than just that, though. There's a "convergence" story going on here as well, according to CAPS member balafon: 

The mantra is convergence. WiFi, GPS, Accelerometer, Compass, etc.- all on the same chipset. [Atheros] is one of the primary players making this happen and bringing down the price point to make smartphones ubiquitous.

Why? Because, according to the Fool's own TMFZahrim, fellow writer Anders Bylund: "the world hungers for more, better, faster wireless networking, [and] "Atheros is likely to deliver the goods. ... recent forays into classic Ethernet controllers and powerline networking are starting to pay dividends. This is a long-term world-beater."

And now just may be your best chance to begin beating the world -- or at least the S&P 500 -- by investing in Atheros stock. As Barron's reported a couple of weeks back, Atheros suffered a steep sell-off in the wake of a Cisco (Nasdaq: CSCO) conference call comment that warned of weakness in Cisco's home networking business. Although up slightly off their post-fear lows, Atheros shares are still selling for a near-10% discount to its prefear price -- and I have to say, Fools, that the price looks nice.

Sure, at more than 30 times earnings, Atheros appears slightly expensive relative to the sub-30-times multiple at one of its networking customers, Netgear (Nasdaq: NTGR), the sub-20 times that Cisco (another customer) itself will cost you, or the low-double-digit multiple at Hewlett-Packard (NYSE: HPQ) (yet a third Atheros client). But there are two reasons why this apparent overvaluation is deceiving.

First, Atheros is growing much, much faster than any of the tech shops named.

Second, Atheros is actually cheaper than its P/E suggests. The P/E, you see, is based on the $74 million that Atheros reported as earnings over the past 12 months. But if you dig into the company's cash flow statement, you'll see that Atheros actually generated more than twice as much cash as its net income would suggest. More than $160 million in free cash flow over the past 12 months, in fact, which gives the company a price-to-free cash flow ratio of less than 15.

Time to chime in
Cheap, fast-growing, loaded with cash, and devoid of debt, Atheros may not be a household name. But it does look like a bargain in the tech space.

Or so say I. What do you think? Tell us here.