Get Ready for the Fall?

"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 not always ...

Companies are selected from the "New Highs & Lows" lists published on WSJ.com on Thursday and Friday last week. 52-week low and recent price provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

And in fact, it looks like Fools are pretty confident in the current crop of 52-week winners. Not a stock on the list scores worse than an average three-star rating. Seems the more the drive to "ObamaCare" stumbles, the more likely investors are to show confidence in health-care stocks such as PDL BioPharma, WellPoint, and Wyeth.

That said, our top-ranked stock this week hails not from the health-care sector. Nor even from the ever-volatile, but ever-hopeful commodities biz. Southern Copper may score well among investors, but let's have a look at one that scores just as well, tiny IT consultant Virtusa.

Never heard of it? Neither had I. But that's a situation easily remedied. Let's dive right in and examine ...

The bull case for Virtusa Corp.
CAPS All-Star Ish100 introduced us to Virtusa back in March of '08 as "an excellent company that ... specialises in IT software development. ... They have a number of blue-chip clients providing a steady revenue stream. The internal setup allows them to leverage top South Asian software developers with US sales team. The management team are outstanding."

Fellow All-Star investor tenmiles agrees that this "rapidly growing IT outsourcing company" is a buy, although he does have some worries about "client concentration risk as roughly ¾ of revenue tied to ten largest clients, including BT (which signed a 5-year $200 million deal), but this is not unusual within this industry which historically has high repeat business." (Still, if this worries you, you'll want to keep an eye on the fortunes of other Virtusa clients such as Aetna (NYSE:AET), JPMorgan Chase (NYSE:JPM), and IBM (NYSE:IBM).)

Meanwhile, as adraaj argued last summer, even if there's some risk involved in this company, they "don't have to do much in order to justify their valuation from this point. They are seeing huge growth (30%) in the banking and financial segments during a rotten time for those businesses. Their overall growth, margins, and cash are very promising." Also, "they are already about 40% insider owned. So they have confidence in their business."

As well they should. Virtusa reported a 12% decline in revenue last quarter, but its profit nearly quadrupled. The company then promptly launched into a share buyback. Between the bullish earnings news and the lift that generally accompanies a repurchase program, Virtusa shares now trade nearly 18% above their pre-earnings levels.

Too high, you say? Perhaps, but I don't think so. Selling for 18 times earnings and generating free cash flow well in excess of its reported earnings over the last four quarters, Virtusa looks cheap to me if the company can achieve anything near the 23% annualized five-year growth that Wall Street expects from it. If you net out the company's enormous cash cushion, the stock sports an enterprise value-to-free cash flow ratio of just 7. Stunningly low for this kind of growth.

Personally, I see no reason at all why Virtusa must fall. To the contrary, I would expect it to keep on rising to higher highs.

Time to chime in
But hey, I could be wrong. The numbers look attractive to me, but surely there's someone out there who has a better grasp of the story behind the numbers?

If that's you, then now's your chance to shine. Is this stock about to make like Icarus and fall from its place in the sun? Or is it really as good as it looks? Click on over to Motley Fool CAPS and give us your opinion on Virtusa.

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