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.

"International." "Mining." These appear to be the words of the day -- or at least of the Year 2009. It seems that investors think that if you dig stuff out of the ground, or do business anywhere-but-here (and preferably both), then you're hot. If not, you're not.

In addition to the fact that they've all doubled since the year began, another thing each of these equities has in common is an involvement in mining, international business, or both. Why, the two top-ranked picks -- the Brazil Index and its component company Vale -- have both!

There is, however, a bit of overlap up there on top, seeing as metals magnate Vale is part of the Brazil Index, almost 7% of it, in fact, and the company's preferred shares make up another 9% of the fund. So let's kill two birds with one stone today, and dig right into ...

The bull case for Vale
CAPS member ervinrw thinks buying Vale today is just "basic common sense. raw material mining will become more lucrative as the recovery starts and a greater demand is placed on the nickel, cadmium, and iron needed to produce steel. Vale is positioned well to take advantage of this opportunity."

Meanwhile, georcole sees Vale as "a play against the dollar. I feel that metals will hold up pretty well over the near term versus the dollar, while the government is not going to time it right when it comes to taking all of this excess money out of the world." And CAPS All-Star dbbfool63 offers a third -- and fourth -- reason to invest in Vale. Namely, its "great P/E," and the fact that Vale "pays a dividend."

Putting the arguments to the test
But do even all these arguments in Vale's favor justify buying the stock? I'm not so sure.

Will raw materials sell well in a recovery? I don't doubt it -- if the economy really is recovering.

Will commodities appreciate in value as the dollar declines? Again, that seems logical -- if the dollar declines.

And does Vale pay a dividend? Yes, it does -- the 2.8% yield looks a bit better than does Rio Tinto's (NYSE:RTP) trailing 2% payout, or even BHP Billiton's (NYSE:BHP) 2.4%. Sure, Vale's dividend does look pretty fat, but clearly there are much bigger payouts out there. I don't really see why Vale should be your first choice for a dividend play unless you're really counting on the raw materials / declining dollar hypotheses for most of the real gains.

But what about the "great P/E" that dbbfool63 mentions? Could that clinch the argument? Maybe. One big point in Vale's favor is that its trailing 14 P/E is less than half the valuation of rival BHP, and much cheaper than Rio Tinto's nonsensical P/E of 112, which has been caused by a massive write-off rather than massive stock appreciation. But you also need to consider why Vale has the better P/E. And the answer to that is ...

Growth. Or rather, the lack of (much of it.) Analysts expect both Rio and BHP to post declining earnings over the next five years, making Vale's projected 0.2% per annum growth look good by comparison -- but only by comparison. Basically, we're looking at a 14 P/E stock with almost no growth prospects for the next half decade -- meaning you'd better like that 2.8% dividend, because it's likely the only profit you're gonna make on this stock for the foreseeable future. In my opinion, this makes Vale a dud of an investment.

Time to chime in
Of course, that's just my opinion. With its five-star rating, it's clear that a lot of Fools disagree with me -- and think the world of Vale. If you're one of them, I'm willing to listen to the counterarguments. Click on over to Motley Fool CAPS and sound off. Tell me why I'm wrong.