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. Below I list a few stocks that may have done just that. Stocks that, according to the smart folks at finviz.com, have more than doubled since the beginning of this year, and just might be ripe to fall back to earth.

Companies are selected by screening for 100% and higher price appreciation year-to-date on finviz.com. Five stars = highest possible CAPS rating; one star = lowest. Current pricing provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

Each of these stocks has enjoyed remarkable gains over the past six months. But if you ask the 135,000 (and counting) investors who make up Motley Fool CAPS, most of them have come too far, too fast.

Nor do I say this, gloating over the prospects of their downfall -- far from it. Longtime Fool readers will recognize that among these top performers are not one, not two, but three Motley Fool recommendations! Whole Foods Market is a Motley Fool Stock Advisor recommendation, Sprint Nextel got the nod from Motley Fool Inside Value, while Baidu is a Motley Fool Rule Breakers pick... as well as the only one of the three that CAPS members seem to believe is priced fairly today.

But it's not the top-ranked stock on this list. That honor goes to ...

Western Digital
CAPS All-Star investor pslorenz recommends this computer hard-drive manufacturer based on its "solid financials and a great product line." BuffDaddy3K agreed in April, calling Western Digital "[o]ne of the best makers of H/D, if not the best." BuffDaddy also likes Western Digital's "[l]ow P/E, P/S, P/B, P/FCF, and low PEG<1."

And we get a first-person perspective on Western Digital's products from Akiraiaia, who confides: "I've owned several WD and Seagate [ (NYSE:STX)] / Maxtor drives. In the past 24 months 4 Seagate drives died while I had no problem at all with WD."

Thanks for the feedback, Akiraiaia (and on behalf of Best Buy, allow me to also thank you for buying upwards of four hard drives in two years. Wow. Somebody likes their toys...)

And here's the best part for investors -- Western Digital's stock looks as good to me as its products do to Akiraiaia. Oh, I know Goldman Sachs (NYSE:GS) came out with a negative opinion on the stock last week, arguing that the company's advantages are now priced into the stock. But I disagree.

With an 11.7 P/E and 14% annualized five-year growth projected, Western Digital's stock looks reasonably priced. In fact, that's already cheap by most measures -- but the stock is actually cheaper still.

Closer examination of the firm's cash-flow statement reveals that Western Digital's reported "earnings" understate the firm's true cash profitability. Over the past 12 months, the firm actually generated $632 million in free cash flow -- but reported earning only $487 million. Valued on its free cash, therefore, the enterprise as a whole -- net cash included -- is actually fetching around a 7x multiple, and relative to its projected growth rate, that's not just cheap. It's downright dirt cheap.

Time to chime in
Goldman Sachs may think that Western Digital is a dud, but from where I sit, this rocket looks to have plenty of jet fuel left in it. With a temptingly low valuation, strong growth prospects, and -- did I mention the fact that it has more than $1 billion in net cash? -- Western Digital's poised to leap higher. I expect it to do just that.

But that's just my opinion. You can take it, leave it, or... tell me exactly why I'm wrong. Fire away, and Fool on!