Whoa! What Just Happened to My Stock?

Resist the urge to high-five everyone in the cubicles next to you. Your stock may have just strapped on a rocket pack and taken off for the moon, but smart investors won't celebrate until they know that upward leap was justified. Without a fundamental basis for the bounce, these stocks can quickly make the return trip down.

Is now the time to lock in profits, or is this just the first step toward even higher valuations down the road? Let's examine several stocks that just hit the afterburners, and see whether they're truly headed into orbit.

Stock

CAPS Rating
(out of 5)

Wednesday's Change

Sunrise Senior Living (NYSE: SRZ  )

**

66.1%

American Apparel (NYSE: APP  )

***

18.0%

Novavax (Nasdaq: NVAX  )

*

16.4%

Source: wsj.com.

On a day when the market jumped 255 points, or 2.54%, even a penny stock can look like a market darling, but might not otherwise amount to much.

The devil's in the details
Let's call American Apparel's revival what it is: a dead-cat bounce. The racy retailer's future looks very similar to the lifeless feline as costs surge, losses mount, and lawsuits from within the company and from shareholders spell an all-but-certain demise.

The company has material deficiencies in its financial reporting, its conga line of auditors have all expressed doubt about its ability to continue as a going concern, it disclosed it may not have sufficient liquidity to survive another year, and federal immigration officials removed 1,500 employees from its payroll, causing manufacturing efficiencies to plummet. Let's not forget American Apparel's loose cannon CEO, Dov Charney, who's been embroiled in several sexual harassment lawsuits filed by employees.

While shoe seller Crocs (Nasdaq: CROX  ) has staged a dramatic turnaround by getting its house in order after being left for dead by most analysts, there doesn't appear to be any similar effort under way at American Apparel. Bury this one in the kitty's litter.

Making it to the old-age home
Sunrise Senior Living is another example of a company getting a new lease on life as it pursues a strategy of getting bigger by going smaller. It has resorted to selling off assets, including to rival Brookdale Senior Living (NYSE: BKD  ) . It's unloaded most of its properties in Germany in a desperate attempt to raise cash, but has defaulted on much of its debt, including that held by the lenders of the German retirement communities.

Yesterday's surge was due to reaching a settlement with health-care REIT HCP that pumps $40 million into it right away in exchange for turning management of 27 assisted-living facilities back over to HCP. Because it also ends litigation between the two while allowing Sunrise to continue managing 48 other HCP-owned facilities, Sunrise was able to use the cash to pay off some of its debt and recapitalize itself.

Despite the challenges, 87% of the CAPS members rating Sunrise indicate it will outperform the broad market averages, though its two-star rating suggests they think there are better opportunities for your investing dollar.

What's bugging you?
Looking at Novavax's move yesterday, you might think we were on the brink of another outbreak of swine flu. Back in those heady days, Novavax, BioCryst Pharmaceuticals (Nasdaq: BCRX  ) , and even Sinovac Biotech (NYSE: SVA  ) soared as the need for a vaccine had investors thinking these stocks were a path to quick profits.

Although we are heading back into the cold and flu season, there wasn't any specific news that accounted for the growth spurt exhibited by Novavax's stock. There's a huge short interest in its shares, amounting to 14% of the float, which may have played a role, and the company's chief science officer bought a slug of stock on Monday. That may have encouraged some investors to think there was positive news forthcoming, and the shorts might have fled so as not to be left holding the bag if something's coming down the pike.

Earlier this year, highly rated CAPS All-Star zzlangerhans warned investors that although Novavax may occasionally gain altitude, gravity has a way of insinuating itself into the game plan:

Every time influenza makes an appearance and the hysteria machine cranks up, the share price shoots to the moon only to plunge back to earth once the market realizes that the vaccines are going to be coming from a large traditional vaccine maker and not one of the army of microcaps trying to horn in on the action.

Going into orbit
Markets are known for overreacting. Just because your stock has taken to the stratosphere, doesn't mean it won't lose altitude. A closer look at what's happened to your stock can give you an edge over other investors who merely follow the market's lead.

That's why it pays to start your own research on these stocks on Motley Fool CAPS, where you can read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made, all from the stock's CAPS page. Then you can decide for yourself whether your stock's headed for re-entry, or off to infinity and beyond.

Try any of our Foolish newsletter services free for 30 days. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.


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  • Report this Comment On September 02, 2010, at 4:44 PM, salest wrote:

    I have been selling American Apparel products to the screen print industry for many years. The demand remains very strong and the growth with the American Apparel brand is greater than other brands.

    The American Apparel brand is well known and the quality of the product is superior to its competition. American Apparel is delivering better than in years past and from watching their inventory daily I believe they have better control of their floor stock than years past.

    The wholesale side of American Apparel is strong and I believe will continue to grow.

  • Report this Comment On September 02, 2010, at 5:35 PM, techperson wrote:

    BioCryst Pharmaceuticals does not make a flu vaccine. They make an intravenous antiviral for use in the ICU on patients about to die. It has a 90% cure rate.

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