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)
|
Yesterday's Change
|
| XenoPort (Nasdaq: XNPT ) |
**** |
56.1% |
| Rare Element Resources (AMEX: REE ) |
* |
16.4% |
| China Shen Zhou Mining (AMEX: SHZ ) |
** |
14.2% |
After tumbling on reports of yet another major earthquake striking Japan, the markets rallied 100 points higher and ended up closing down just 17 points on the day. So stocks that went significantly higher are bigger deals.
New frontiers in investing
Overcoming objections that its restless leg syndrome therapy Horizant may cause pancreatic cancer in lab rats, XenoPort and partner GlaxoSmithKline (NYSE: GSK ) got the nod from the Food and Drug Administration to market their drug. While the shares naturally soared higher on the news, investors would be wise to not forget the pummeling XenoPort took just over a year ago when the regulatory agency issued a complete response letter to the drugmakers because of the cancer-causing properties of the treatment.
The road between here and the market is a lot smoother than it was last year. There will be only minimal competition from Pfizer's (NYSE: PFE ) Neurontin -- on which it's based (and was the reason behind a lot of the surprise over the FDA's letter last year) -- and Depomed (Nasdaq: DEPO ) .
It also showed that XenoPort could work with the agency to overcome concerns, which ought to be useful down the road. Highly rated CAPS All-Star IBDvalueinvestin finds it very easy to recommend the drugmaker at these levels, even after the jump in price: "[XenoPort] was once $60/shr now on approval its $10.48, this one is easy to thumb up."
Let us know on the XenoPort CAPS page why investors may not get restless waiting for this stock to rise further.
Not an uncommon occurrence
The rare earth elements segment got a boost after a congressman introduced a bill calling for the U.S. to establish a stockpile of the elements derived from U.S. sources. Understandably, Rare Element Resources and Molycorp (NYSE: MCP ) jumped higher on the news -- Molycorp was up 10% -- though China Shen Zhou Mining joining in on the surge was undoubtedly more of just a halo effect surrounding the sector.
As exciting as the potential sounds, however, I'm still bearish about what it ultimately means for most of the companies rallying here. The legislation is similar to one that was introduced -- and died -- last year, and a "stockpile" creates its own fair share of critics. Moreover, Rare Element Resources isn't ready to begin mining anytime soon, even if the bill was signed into law today. There's a lot of hope and prayer baked into Rare Element's stock price.
As CAPS member OrionNebula even the company's own estimates of the fair value of its reserves doesn't justify the value the market is assigning it.
According to the materials on [Rare Element]'s own website, the net present discounted value (post cost, post tax, and discounted) of the main mine, based on *estimated* deposits, is no more than about $300 million. There is also around $70 million in cash on hand. The company is years away from production of anything. Rare earth elements are at an historical high price now. Downthumb. I did not however evaluate the potential value of gold at Sundance, also years away from production. That's all I got.
I'm even more bearish about China's miner, since it's not even pursuing rare earth elements, but rather fluorite. Its mines might contain trace elements, but the company itself ignores mentioning any potential benefit from the possibility.
You're permitted to dig down further on the China Shen Zhu Mining CAPS page, and add Rare Element Resources to your watchlist to see whether this really is a rare opportunity.
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.
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