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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 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)

Wednesday's Change

Krispy Kreme Doughnuts (NYSE: KKD  ) * 20.8% India (Nasdaq: REDF  ) ** 19.9%
Finisar (Nasdaq: FNSR  ) *** 16.6%

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 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 India has staying power to compete against the likes of Chinese search engine (Nasdaq: BIDU  ) or Google.

That said, [ 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 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.

Google is a Motley Fool Inside Value pick. Baidu, Google, and Infinera are Motley Fool Rule Breakers selections. The Fool has written calls (bull call spread) on Cisco Systems. Motley Fool Options has recommended writing puts on Infinera. The Fool owns shares of Google and Infinera. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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

Read/Post Comments (3) | Recommend This Article (9)

Comments from our Foolish Readers

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  • Report this Comment On December 03, 2010, at 4:06 PM, EPS100Momentum wrote:

    I will agree with you on a return trip down for REDF & KKD but not with FNSR.

    Finisar actually gave us real reasons not only to high five the buddies next to us but also to add to our positions on confirmation that its growing even faster than earlier predicted. Leading us to believe that the company may once again be low balling the higher guidance numbers to save some dry powder for next qtr.

    FNSR guided for continued upward guidance for the foreseeable future.

  • Report this Comment On December 04, 2010, at 5:40 PM, rc168rc168 wrote:

    If KKD is so poorly managed, then why did it just beat on both the top and bottom lines and also increase its earnings target going forward? It must be doing something right.

  • Report this Comment On December 17, 2010, at 3:03 AM, jmontgomery86 wrote:

    I agree with rc168rc168. Management is working on turning things around. At the moment, it is overpriced because new investors are taking a new look at KKD. At the moment, they are paying down debt and working on company owned stores. The downside to the whole mess is wayyy too much expansion in the international market (300 stores opened in 3 years) and an increase in commodity prices (sugar) in the coming years. They are countering by testing labor schedule software and decreasing ingredients used. Also, they are reviewing current delivery truck methods and shelf stocking methods to get the most out of their grocery/convenient store sales.

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