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)

Monday's Change

Farmer Brothers (Nasdaq: FARM  )

***

24.8%

Genetic Technologies (Nasdaq: GENE  )

*

17.3%

Arch Chemicals (NYSE: ARJ  )

***

12.3%

With the Greek bailout only a stopgap measure and fears of a default contagion spreading to Europe, the Dow dropped 151 points yesterday, or 1.2%. So stocks that went significantly higher are pretty big deals.

Brewing up a bargain
There was no company-specific news causing coffee seller Farmer Brothers shares to run higher, but Dunkin Brands, the owner of Dunkin Donuts and Baskin Robbins, announced in a regulatory filing yesterday it was looking to raise $460 million in an IPO. Considering Coffee Holding was up almost 10% too, investors in these small-cap coffee shops may be hoping for some sort of halo effect. More established players like Starbucks (Nasdaq: SBUX  ) , Green Mountain Coffee Roasters (Nasdaq: GMCR  ) , and Peet's Coffee had little or no reaction.

Although prices fell over the weekend, coffee prices are nearly double what they were a year ago, but you probably know that if you've been shopping recently. But don't think of Farmer as some Johnny-come-lately to the coffee wars or an upstart trying to capitalize on rising coffee prices. Farmer Brothers has been around for 100 years and distributes coffee to institutional food-service establishments such as restaurants, hotels, casinos, and hospitals, as well as convenience stores, coffee houses, and grocery stores.

Priced at just 0.43 times sales even after the jump, it does look cheap compared with Coffee Holding (1.53), Peet's (2.30), Green Mountain (7.44), and even Caribou Coffee (1.01). But Farmer hasn't been a particularly profitable venture, which underscores why sometimes cheap stocks are cheap, and the CAPS community remains cautious. A little more than two-thirds of those rating it believe it can beat the market.

Brew up some thoughts on the Farmer Brothers CAPS page and follow its progress by adding the trucker to the Fool's free portfolio tracker.

It's in your genes
After yesterday's big move, Genetic Technologies requested that its shares not trade on the markets as it considers raising capital. Back in May, it received approval to manufacture a breast-cancer test for women at moderate risk of contracting the disease, meaning it would be able to sell the test in the United States. It would be moving into a potential $500 million market with no direct competitors. It says the halt in trading should last no longer than Thursday.

Genetic Technologies is also the exclusive licensee of Myriad Genetics' (Nasdaq: MYGN  ) BRCA patents in Australia. BRCA1 and BRCA2 are the genes that indicate breast-cancer susceptibility.

Is there good news to be announced, since the company is looking to raise capital, which could indicate a big sales push? Or is it bad news, as there is a lot of litigation that's arisen from a court ruling that companies can't patent isolated DNA sequences since they occur in nature? Sometime between now and the lifting on the trading halt, Genetic Technologies will clarify things. Until then it is speculation.

I'm leaning toward the former, though investors generally don't much care for the biotech's prospects. Fewer than 30% of the CAPS members rating Genetic Technologies think it can beat the broad indexes, but you can add it to your watchlist to keep tabs on whatever developments might crop up as a result of this move.

Chemically bonding
At least for specialty chemical maker Arch Chemicals, there was an obvious reason for its stock's move: Swiss chemical giant Lonza agreed to buy it out for $1.2 billion, or $47.20 a share.

But maybe there was too much of a reason for Arch's jump, since before anyone even knew a deal was in discussion, the chemical company's stock was on the move, rising 11% Friday to finish up more than 21% for the whole week. It sure looks like the cat was let out of the bag, as the S&P 600 Specialty Chemicals index was up less than 3% for the week and individual names such as Huntsman (NYSE: HUN  ) and LyondellBasell Industries were up just 3% and 5%, respectively

But Arch Chemicals was already an investor favorite, albeit a sparsely followed one. All 24 CAPS All-Star members that rated the specialty chemicals maker think it will outperform the broad market averages, and late last year, mrindependent said it offered the right combination of stability, dividends, and growth potential.

I think that Mr. Market will reward this type of stock in the near future as investors flee bonds in search of higher yields. Stable stocks should look appealing given the uncertain economic future for developed economies. The current dividend yield of Arch Chemicals, Inc. is about 2.3%. Current ROE is 16% and the stock is trading for just 15 times expected earnings.

Let us know in the comments section below or on the Arch Chemicals CAPS page whether you think someone attempted to profit on inside information.

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.

The Motley Fool owns shares of Starbucks. Motley Fool newsletter services have recommended buying shares of Green Mountain Coffee Roasters and Starbucks, creating a lurking gator position in Green Mountain Coffee Roasters, and shorting Peet's Coffee & Tea. A separate service has recommended shorting Green Mountain Coffee Roasters. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Rich Duprey has no financial position in any of the stocks mentioned in this article. You can see his holdings. The Motley Fool has a disclosure policy.


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