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 move up 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 to see whether they're truly headed into orbit.
CAPS Rating (out of 5)
|Krispy Kreme Doughnuts (NYSE: KKD )
|Rediff.com India (Nasdaq: REDF )
|Finisar (Nasdaq: FNSR )
Market bulls have put together two consecutive days of significant gains, overcoming most of November's losses. Yesterday, the market was up another 106 points, or 1%, yet stocks that went up significantly more are still big deals.
The devil's in the details
Although positive economic news was helping to drive the market higher, strong earnings reports were behind the moves by Krispy Kreme Doughnuts and Finisar. There was nothing in particular to account for Rediff.com India's surge, though. In its latest quarter, the Indian Internet portal reported a 21% increase in revenues, which led to a narrower loss.
However, India's economy grew 8.9% in the third quarter, well ahead of expectations, and economist Nouriel Roubini predicted the country may grow even more than China over the next decade. Considering that Sify Technologies and ICICI Bank also had sharp gains over the past two days, we might expect to see more investors piling into such Indian names because these companies rely on their domestic markets for the bulk of their revenues.
Yet CAPS All-Star TSIF isn't sure that Rediff.com India has staying power to compete against the likes of Chinese search engine Baidu.com (Nasdaq: BIDU ) or Google.
That said, [Rediff.com India] shares have ridden up 200% in September before giving back a third of the gains this month. As an India Search Engine they have some growth potential, and appear to be riding off Bidu/Google, etc. I don't see them as a contender, at least in the near term, but at least resistance levels are hardening as the float has turned over at these levels. I might escape...but I doubt it.
Tell us on the Rediff.com India CAPS page whether the subcontinent's leading portal can achieve higher growth.
Making it to the big time
It's not surprising that with its spotty record of profitability, CAPS members would remain leery of investing in Krispy Kreme Doughnuts. They're almost evenly divided on whether it can turn out market-beating results, no doubt reflecting Ritio's opinion that you're better off eating there than investing there.
This stock is unreliable, as mentioned previously the dodgey history with work is not worth the risk. Great donuts, but what appears is a poorly run company.
Caligiuri also wonders where growth is going to come from, though management has suggested it will be from around the world. With Krispy Kreme planning to open twice as many international franchise stores as domestic ones, you can keep track of its progress by adding it to your watchlist to have all the Foolish new and analysis gathered for you in one place.
Finisar reported that it's growing, sending not only its stock higher, but those of other optical networking companies such as Oclaro (Nasdaq: OCLR ) , which was up 9%, and JDS Uniphase, which was 4% higher. Even beaten-down Infinera (Nasdaq: INFN ) , whose own soft outlook back in October helped put a damper on the sector, was up almost 4% the other day.
The difference between Finisar and Infinera was that Infinera forecast sales below analyst estimates while Finisar suggested its own sales would be higher. A series of mixed messages have come out of the sector, with Oclaro having said there was widespread weakness and Cisco seemingly confirming that with its own guidance last month. Finisar is essentially saying the market's not dead, at least not for certain players.
All-Star CAPS member TMFZahrim said last month that despite the complexity of the sector, you can see the potential Finisar offers.
This component maker is an important cog in the optical networking industry's complicated machinery. There's a ton of growing left to do here, and Finisar's stock isn't even expensive.
Going into orbit
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.