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

Qiao Xing Universal Resources (Nasdaq: XING  )

****

21.2%

AMR (NYSE: AMR  )

*

12.6%

Delta Air Lines (NYSE: DAL  )

*

10.9%

On a day when the markets reversed course and jumped 129 points, or 1.2%, stocks that went even higher are big deals. Yet with movement like that, even a high-flying blue chip can look like a volatile penny stock.

The devil's in the details
Sometimes there's no real reason for a stock to move as it does. Ambac Financial has been a yo-yo these past few days, moving sharply lower on Monday, rebounding higher on Tuesday, only to fall again yesterday. And there was pretty much no news directly associated with the company to account for the gyrations.

So it is with Qiao Xing Universal, one of the market's top gainers yesterday, but no news specific to it to provide a reason for the move. Is there something afoot in its attempt to purchase Qiao Xing Mobile (NYSE: QXM  ) , a subsidiary it already owns more than 60% of? That stock was also up almost 10% yesterday.

Qiao Xing Universal is a company I've already expressed doubts about several times because of its decision to change from a mobile communications company to a natural resources play by buying a copper and tin mine. Interestingly, it wasn't that long ago that Universal spun off Mobile, but now it wants to take it under its wing again.

Despite Qiao Xing Universal's four-star status on CAPS, this is one I have difficulty believing will outperform the market. Obviously I'm in the minority on this one as 94% of the members rating Universal Resources think it will turn in market-beating results, and WPThatcher believes the acquisition of Mobile for the cheap price is a steal.

I actually agree. The offer, while a premium over the stock's closing price prior to when the offer was made, is actually below the value of the cash Mobile has on the books, one analyst notes, plus the value of its receivables and inventory that it would essentially get for free. Perhaps it has to do with the fact that Universal Resources is the majority owner and can essentially force the deal though at the expense of Mobile's minority shareholders. That doesn't sound like good governance to me, and is part of the reason I've marked Qiao Xing Universal Resources to underperform on CAPS.

Making it to the big time
Airline stocks also took flight yesterday as American Airlines parent AMR, Delta Air Lines, and US Airways (NYSE: LCC  ) all reported better-than-expected earnings. And not just "better" as in the sense of being less bad, but actually the triumvirate all reported profits. In the airline industry!

They all suggested that better economic conditions helped bring about a change in fortunes and strong international demand gave their operations some much-needed altitude. Nor did it hurt that Delta said the current quarter was looking pretty good too. The results were enough to lift the entire sector, with the stocks of United Continental (Nasdaq: UAUA  ) and JetBlue Airways (Nasdaq: JBLU  ) rising 7% each.

The developments were a surprise to CAPS members too, where more than one-third of those rating AMR, for example, believed it would underperform the market averages and somewhat less than half felt Delta would fall too. In fact, highly rated CAPS All-Star PatientStudent said if forced to choose between the two, AMR would be the preferred carrier just by comparing their capital expenditures.

I don't mean to suggest that American is a healthy company. But, I would expect CapEx to trend closer to D&A. Falling substantially short will necessitate a large catchup eventually. Either that or the company shrinks, or parts of it are just allowed to get old. Wait too long on CapEx, and Delta's $14 billion in goodwill and other intangibles could be in trouble.

Going into orbit
Just because your stock has taken to the stratosphere doesn't mean it won't lose altitude. Markets are known for overreacting. 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 reentry, 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. The Motley Fool has a disclosure policy.

Fool contributor Rich Duprey currently does not own any stocks as you can see here.


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  • Report this Comment On October 22, 2010, at 9:26 PM, sy1797 wrote:

    I've marked Qiao Xing Universal Resources to underperform on CAPS.

    SXYAM to Rich Duprey 'You're Joking ... Right?'

    http://seekingalpha.com/instablog/217363-mark-situ/103794-xi...

    Last Trade: $1.71

    Most Recent Quarter (mrq): Jun 30, 2010

    Balance Sheet

    Total Cash (mrq): $549.21M

    Total Cash Per Share (mrq): $5.97

    Total Debt (mrq): $125.57M

    Book Value Per Share (mrq): $5.38

  • Report this Comment On October 23, 2010, at 2:51 PM, crmeyer81 wrote:

    Regarding XING: I believe that due to the tremendous volume surge on Wed and Thurs, there is much more afoot that you lead us to believe. Something big is coming and I took a significant position at the close on Friday on the hopes that it's true. We'll just have to wait to see what the news is.

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