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Extra7/9/2008 12:01 AM ET

5 soaring stocks ready for a fall

Collective wisdom can give investors an early warning on stocks poised for a pullback. One candidate: Goldcorp, one of the world's biggest gold miners.

By The Motley Fool

"The bigger they are, the harder they fall." It's the worst nightmare of every investor in today's market -- buying a hot stock just before it takes a nosedive.

Every day, Web sites such as this one list companies whose shares have hit new 52-week highs. And every day, investors read the list and tremble -- some with greed, others with terror.

On our MSN 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 research. Stocks rise for many reasons, but a little help from CAPS can make it easier to assess the worthiness of those reasons.

Let's see what some of the 110,000 stock gurus in CAPS have to say about some of stocks that recently hit one-year highs.

When stocks soar on the wings of success, bears become rare. So I guess it should come as no surprise that on the cusp of a potential bear market, investors remain loyal to these and other uber-successful stocks.

Topped out?
CompanySector52-week high (date reached)July 8 closeCAPS rating

Weatherford International

Oil-field services

$49.98 (June 30)

$41.92

*****

Hercules Offshore

Oil and gas drilling

$39.47 (June 30)

$33.24

*****

BP Prudhoe Bay

Oil and gas refining and marketing

$108.40 (July 7)

$95.42

*****

Complete Production Services

Oil-field services

$37.84 (July 2)

$34.03

*****

Goldcorp

Gold

$49.10 (July 1)

$43.86

****

Out of five stocks listed above, the least-respected company, Goldcorp (GG, news, msgs), still earns an above-average four-star rating on CAPS.

Now, the purpose of this column is to help you identify overblown growth stories -- rising stocks that the "wisdom of crowds" believes are destined to go right back down. We don't have any of those today.

So what's the next best thing to watching as the CAPS community pins a dog of a stock? Well, we can at least begin looking for fleas. Of these five companies, Goldcorp has the highest bear factor of the bunch, with 102 out of 1,622 investors polled betting against the stock.

So far, that's been a sucker's bet, but could that change? You be the judge.

The bear case on Goldcorp

Back in April, "KenbuddyPS" summed up the Goldcorp bear thesis in two words: "commodities bust." At about the same time, "Trunks9" added some detail: "One sure sign of a bubble is when people completely ignore price to earnings, and believe that no price is too high."

But the most detailed argument against Goldcorp, by far, comes from "BarbarasBasics," who tells us:

Stock Charts (Year)

Goldcorp
Graphical chart for GG
Yamana Gold
Graphical chart for AUY
Kinross Gold
Graphical chart for KGC
"Gold shares are amazingly, predictably seasonal. I have looked at seasonal patterns for over a hundred years and it is running about 95% that gold and the stocks have seasonal lows within a few weeks of July 4th, and again within a few weeks of Dec 31st. The reason is that the mining companies like to show a clean balance sheet for maximizing their banking relationships at this time and stocks follow. So (Goldcorp) is due for a pullback just from that. In addition, some easing of commodity prices, especially oil and soft commodities, seems likely to me and the commodity funds now mix oil, gold and softs, so if any of these is conspicuously weak, it pulls the fund and others down with it."

Addressing Trunks9's concern about P/E first, I do see some basis for worry. Goldcorp sells for a forward price-to-earnings ratio of 43, which seems pricey relative to peers Yamana Gold (AUY, news, msgs) (forward P/E of 16) and Kinross Gold (KGC, news, msgs) (forward P/E of 34).

And while growth estimates for Yamana may explain the lower valuation there, analysts are looking for Kinross to grow nearly 2 percentage points faster than Goldcorp over the next five years.

Also worth pointing out: Goldcorp and Kinross report having almost identical amounts of gold reserves -- yet Goldcorp carries a market cap more than twice that of Kinross.

So relatively speaking, Goldcorp is worth more than Kinross, yet it's growing its earnings less swiftly and boasting less shiny metal on its balance sheet. I admit that this falls a few cogs short of a working "sell" thesis, but it does make for an interesting comparison.

Are four stars enough to convince you to own Goldcorp? Does the stock have other issues we didn't address here? Click over to CAPS and tell us what you think.

This article was reported and written by Rich Smith for The Motley Fool. At the time of publication, he owned none of the stocks mentioned.

Editor's note: MSN CAPS is an investor intelligence service hosted by The Motley Fool. Companies are rated by players to outperform or underperform the market and are subsequently ranked from one star (the lowest) to five stars. Between Jan. 3, 2007, and May 12, 2008, five-star companies outperformed the SPDR Trust, an exchange-traded fund that tracks the S&P 500, by an average of 9 points, annualized, while one-star companies underperformed by an average of 15.6 points, annualized.

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