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The markets are reversing course yet again, putting together several consecutive days of rising higher. But resist the urge to high-five everyone in the cubicles next to you just because your stock just strapped on a rocket pack too. 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.
CAPS Rating (out of 5)
|Radian Group (NYSE: RDN )||**||20.5%|
|Aspen Technology (Nasdaq: AZPN )||*||17.2%|
|ATP Oil & Gas (Nasdaq: ATPG )||****||15.5%|
Source: Motley Fool CAPS.
The Dow soared 144 points yesterday, or 1.3%, so stocks that went appreciably higher are pretty big deals.
Hot stock in the house
Maybe it's a case of “your loss is my gain,” but private mortgage insurers Radian Group and MGIC Investment (NYSE: MTG ) were soaring a day after PMI Group was shut out of doing any more business in the state of Arizona. Of course, PMI jumped higher too, so maybe investors weren't ready to write off the industry just yet.
But investors might want to reconsider their optimism. First, PMI also announced that its PMI Mortgage Assurance subsidiary is no longer eligible to write new business in any state, and as it was the only unit writing insurance for PMI, it has no way of doing business now. There was simply no reason for PMI's stock to rebound the way it did when it's perched on the ledge of bankruptcy like this.
Business isn't looking good for Radian or MGIC, either. Mortgage delinquencies rose for the second straight quarter, increasing to 8.44% at the end of June. The first-quarter delinquency rate was 8.32%, which was up from 8.25% in December. Unemployment, a factor in delinquency rates, rose to 9.2% from 8.8% the quarter before.
A year ago, the company was operating at a net loss and was trading in the $6-7 range. As of this past quarter, they were operating with positive net income and continue to reduce their delinquent loans while improving their risk portfolio by ensuring that they loan to people with good FICO scores. All of this, yet the stock is trading below $3.
Tell us on the Radian Group CAPS page whether you have enough assurance to put your money into mortgages.
Not yet peak performance
The investment thesis for Aspen Technology is also one that needs a long time horizon to see it come to fruition. The maker of optimization software for process manufacturers changed the way it charged for its product, going from an upfront payment for the license to a subscription service with payments made over the life of the license.
Maybe it's like a magazine subscription with automatic renewal, where you're more likely to keep subscribing rather than taking the time to consider at the end of each period whether you really need or want the rag. But the recurring revenue model should eventually work to Aspen's benefit, though it admits that for the next few years, revenues will be lower than they were previously (until all the upfront payment customers convert to the subscription model). Moreover, profit margins will be lower since expenses remain high. But the change helped improve fourth-quarter results.
With some of the biggest companies in the oil field, engineering, and pharmaceuticals, including ExxonMobil, Jacobs Engineering, and Pfizer (NYSE: PFE ) , it has a pretty elite clientele list. Yet it's also having to face off against some bigger and better-financed rivals like ABB, SAP, and Oracle (Nasdaq: ORCL ) .
CAPS member ptaussig is willing to bide his time waiting for the new revenue recognition policies to kick in growth: “Accounting change regarding revenue recognition is now starting to show up as reaccelerating revenue and earnings growth over next 1-2 years.”
Deep in the thick of it
The bull case for ATP Oil & Gas is finally paying off. With more than two-thirds of its oil and gas reserves in the Gulf of Mexico, it was able to start producing again at one of its deepwater wells there, the third one since it regained its drilling permits from an intransigent Interior Department.
Not that ATP still doesn't have issues to contend with, as it remains a heavily debt-ridden, cash-strapped driller that's continuously going to the markets to raise cash. Still, business should be brisk. Ensco (NYSE: ESV ) reports that all of its rigs operating in the Gulf are earning full-day rates, with the latest rig expected to earn $530,000 a day plus expenses.
With over 95% of the nearly 1,400 CAPS members rating ATP to outperform the broad indexes, it's clear they never had much of a doubt about its ability to return to production and growth. Add the stock to the Fool's free portfolio tracker to track all the news and analysis about it, then head over to the ATP Oil & Gas CAPS page and drill down for additional insights.
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.