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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.
|Exelixis (Nasdaq: EXEL )||
|Empire Resorts (Nasdaq: NYNY )||
|Allied Irish Banks (NYSE: AIB )||
The devil's in the details
Famed money manager Peter Lynch has noted that insiders can sell shares of company stock for lots of reasons, but typically only buy them for one: they think it's going to go up in value. Investors in biotech Exelixis were given a heads up to that possibility a couple of months ago when insiders began buying about $1.5 million worth of shares, perhaps as a vote of confidence after the partnership with Bristol-Myers Squibb (NYSE: BMY ) for the last-stage cancer drug XL184 ended and the company CEO left.
That was validated yesterday when it reported positive mid-stage trials on the ovarian and prostate cancer therapy. The stock was one of the market's best performers yesterday, second only to the Bank of Ireland (NYSE: IRE ) , which was up 33%. The drug appears effective in shrinking tumors in ovarian cancer patients and in clearing up bone lesions from prostate cancer, and Exelixis is testing it on nine other tumor types.
Most of the CAPS community is bullish too. Of the more than 2,500 members that rated the biotech, 96% believe it will outperform the broad market averages. But let us know on the Exelixis CAPS page whether we'll be more insiders buying stock.
Making it to the big time
It was the possibility of a buyout, or rumor to that affect, that seems to have investors betting big on Empire Resorts. The troubled racetrack operator, which runs Monticello Raceway in upstate New York, might get a boost from its biggest shareholder, Kien Huat Realty, which also just gave it a loan allowing it to pay in full convertible senior notes due 2014.
Monitcello has a couple of opportunities for growth. New Jersey seems determined to close down its Meadowlands racetrack, ending the state's $30 million-a-year subsidy to it, as part of the state's effort to revive Atlantic City. Casino operators from Harrah's to The Borgata (a joint venture of MGM Resorts (NYSE: MGM ) and Boyd Gaming (NYSE: BYD ) ), have been reeling from lower revenues. October gambling revenues dropped 12.3% over the year ago period.
More important might be the Wisconsin-based Stockbridge-Munsee tribe of Mohicans reaching a deal with New York to open a casino in the Catskills. Whether that deal survives expected legal challenges remains to be seen and Empire could see its stock teeter with each new development.
More than three-quarters of CAPS members who've rated Empire Resorts believe it will bring in market-beating results down the homestretch. Yet as much as I love horse racing, the "sport of kings" is sadly dying and a bet on Empire seems like a losing one to me. I've marked it to finish out of the money on CAPS, but you can place your own bet on the Empire Resorts CAPS page.
You can also be a railbird by adding it to Fool.com's free portfolio tracker where all the Foolish news and analysis will be compiled in one convenient place for you.
Hyperventilating over oil
I also wouldn't be depositing any coin of the realm in Irish banks either these days. While Bank of Ireland and Allied Irish Banks got a boost from Ireland's decision to possibly accepting a bailout for both its government and its banks, these are troubled institutions nonetheless in a country wracked by financial chaos.
There is not enough equity left in both AIB and Bank of Ireland combined to exchange for this capital requirement. If the government provides the capital in exchange for preferred shares, then the EU will insist that the dividend is paid in shares. If the Irish government has the money to do this, which it currently doesn't, it is a certainty that it will end up owning 100% of both banks. If the ECB or IMF steps in and insists on a renegotiation with bondholders, it would be stupid to assume that the current common shareholders will retain any value. Either way, common shareholders are bust.
Tell us on the Allied Irish Bank CAPS page whether the luck of the Irish can come to the aid of the bank.
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.