"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 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 130,000 stock gurus (and counting) in CAPS have to say about the list's latest contenders:


One Year Ago Today

Recent Price

CAPS Rating
(5 max):

Monro Muffler Brake




Lincoln Educational




Rohm & Haas  (NYSE:ROH)




Hot Topic  (NASDAQ:HOTT)




Five stars = highest possible CAPS rating; one star = lowest. Companies are selected from the "New Highs & Lows" lists published on WSJ.com on the Saturday following close of trading last week. One year ago and current pricing provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

"Everybody loves a winner"
When stocks soar on the wings of success, bears are supposed to become rare. Our rogues gallery of stocks this morning includes just one company garnering even lukewarm views from the CAPS investing community (Monro Muffler). As for the rest, they range from distrusted to despised. And speaking of "despised," teen clothier Hot Topic surged on better-than-expected earnings earlier this month, widening its year-long lead over rivals like Gap (NYSE:GPS), American Eagle (NYSE:AEO), and Abercrombie (NYSE:ANF). So why do Fools remain so cool on Hot Topic?

Let's find out, as our very best investors -- the CAPS All-Stars -- lay our their ...

... bear case against Hot Topic

  • jamasony2 states the case plainly: "Niche retailer with P/E over 20? Methinks not. Still in a long term downtrend, even with last year's price doubling."
  • cmoney85 is similarly astounded: "Some how they are still making money, but I just can't figure out how. 2009 will take a toll ... It just can't keep outperforming the market. I'm calling for $5 again in the next 4-8 months."
  • So how is Hot Topic making money? OldEnglish gives us an answer with a dose of teen angst irony: "Some of you think Hot Topic is a fad? You haters are totally bogus. ... Hot topic rules. I got some gnarly stone washed jeans and LA Gear shoes with lights in the soles there last week. Lights in the soles Fools! Now, me and Mr. Peabody are going to hop back in the time machine. Word."

Reality bites. But does Hot Topic?
Um, OK. I think that was ironic. (Ever since Reality Bites came out, I've been unsure of the definition.) In general, some of the best minds of CAPS appear to think the stock is priced to fall, and there's good reason for that. Consider what you get for your 21 P/E purchase price today:

  • a 4% operating margin -- that's lower than either Wal-Mart (NYSE:WMT) or Target (NYSE:TGT) earn, yet you can own either of these more recession-resistant, diversified retailing stalwarts for 33% to 50% off the P/E charged for Hot Topic shares.
  • Returns on equity and capital that have both fallen by two-thirds over the past five years
  • Management's assurances that cash flow has "improved" -- but no cash flow statement to prove the improvement. This disclosure clearly falls short of the standard Fools have set for "The Perfect Earnings Report."

It all adds up to a lot of uncertainty about Hot Topic's prospects. That said, I want to make one thing clear here: While CAPS members are wary of the stock -- and have good reasons for worry -- I myself am not 100% convinced it is overpriced. Here's why: Although management has not yet provided us its most recent cash flow numbers, the numbers we have seen in the four quarters preceding this month's news do suggest strong cash generation -- something in the neighborhood of $34 million annually.

To me, the resulting valuation on this stock -- 12 times annual free cash flow -- seems reasonable if Hot Topic can achieve the near-15% annual growth targets that Wall Street expects from it. I cannot call the stock "cheap" until I see the most recent numbers, of course. But neither am I convinced the stock is quite as expensive as some Fools seem to think.

Time to chime in
Of course, the aim of this column isn't just to tell you what I think about Hot Topic -- or even what other CAPS players are saying. We really want to hear your thoughts. Click on over to Motley Fool CAPS and tell us what you think.

Motley Fool CAPS : It's fun, it's free, and it just might make you famous.

Wal-Mart Stores is a Motley Fool Inside Value pick. The Fool owns shares of American Eagle Outfitters.

Fool contributor Rich Smith does not own shares of any company named above.You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 441 out of more than 130,000 members. The Fool has a disclosure policy.