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 upward.

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, according to the smart folks at finviz.com, 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 past 12 months on finviz.com.
Current pricing provided by Yahoo! Finance.

Another week, another loss. After watching the S&P shed 5% of its worth last week, you could be forgiven for thinking "stocks" have gone to heck in a handbasket. But while that's true of most, it's not true of all. Take a step back, and view the market from a broader perspective, and you'll find many companies have performed just fine over the longer term. 

"Houston, we have a couple of problems ..."
Shares of Wynn Resorts have more than doubled over the past year. That's better than even Icahn favorite MGM Resorts (NYSE: MGM) can boast, but pales in comparison to Las Vegas Sands' clean triple.

Some investors are ready to bet there are more gains in store. CAPS member BiggDude looks at Las Vegas Sands and sees "Asian Gambling growth of 30% or greater each year going forward," combined with a "U.S. economy to improve in 2011."

DividendCow agrees on the China angle: "With Wynn having a large presence in Macau they should have room for growth with the opening of Encore Macau this year, Macau showed a 60% revenue increase in 2009 which will boost Wynn."

And yet, with Las Vegas Sands rated only two stars on CAPS, and Wynn getting just one, it appears these investors are in the minority in their optimism. Their CAPS star ratings suggest that these stocks are going down.

Is four-star Cirrus Logic any less risky a gamble? A lot of Fools think so. Let's find out why.

The bull case for Cirrus Logic
What's the bull thesis for Cirrus? In a word, it's Apple (Nasdaq: AAPL). As CAPS member Futz135 advises, Cirrus' chips are: "A key component to all of Apples new products from ipod, ipad, iphone and their laptops." Fellow Fool Anders Bylund last month described how Cirrus has parlayed its success with Apple into similar product placements with Sony (NYSE: SNE) and Harman. Futz135 notes: "With [Verizon (NYSE: VZ)] looking to offer the iphone this should be a good play from that new demand."

Not that Cirrus needs it. CAPS member thomasj173 points out that the company's "Financials were good before the iPad craze. Only going to get better now that everyone wants a piece!"

All together now: "How good are the financials?" CAPS All-Star ipfmanager responds that the stock has a "peg still under 1." (For more on the PEG ratio and its significance, click here.)

So, Cirrus has high growth, with Apple's success at its core, and a value-priced PEG. What more could an investor want?

Exciting numbers
Um, not to sound ungrateful, but how about a bit of cash? To my Foolish eye, it's there that the bull run for Cirrus may falter; tripped up by free cash flow insufficient to support its bullish GAAP earnings.

Over the past 12 months, Cirrus has racked up a grand total of $21.4 million in free cash flow -- far short of the $38.4 million it reported as the earnings that help keep its PEG ratio so low. Value the company on a cash basis, and Cirrus is selling for about 49 times free cash flow, which you must admit is quite a pretty penny.

This apparent disconnect having piqued my interest, I decided to look closer at the PEG ratio itself. Turns out, it's not as good as it purports to be, either. Valued on trailing earnings, Cirrus sells for 27 times these earnings -- which when you apply the firm's projected 19% growth rate, results in a PEG ratio of 1.4 -- or twice the value reported on Yahoo! Finance. (Which appears to calculate the PEG based on an assumption Cirrus will hit its forward earnings guidance, a sometimes fatal mistake.)

Rocket stock, or dud?
As our CAPS members point out, Cirrus the company appears to have a bright future. So long as Apple does well, Cirrus should prosper. Problem is, these sunny prognoses seem already baked into the stock's valuation. At today's price, I fear anything short of perfect performance by Cirrus could turn this rocket stock into a dud of an investment.

But that's just my opinion. What's yours? Tell us about it on Motley Fool CAPS.