A better economic report and Europe stepping back from the financial abyss helped drive stocks higher yesterday, but just because your stock strapped on a rocket pack and went even higher resist the urge to high-five everyone in the cubicles next to you. 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)
|American Superconductor (Nasdaq: AMSC )||**||15.0%|
|Meritor (Nasdaq: MTOR )||*||13.2%|
|LG Display (NYSE: LPL )||***||12.1%|
With the Dow Jones Industrial Average (INDEX: ^DJI) jumping 148 points yesterday, or 1.3%, stocks that went appreciably higher are pretty big deals.
China has been lobbying hard to become a full member of the World Trade Organization, but the government's willingness to look the other way when it comes to piracy and corporate espionage should be a considerable stumbling block if it comes up for a vote.
The case of American Superconductor is one where China can prove it's committed to being a full partner. It can ensure that Sinovel, the former customer of the wind-power components maker, does not escape justice for its corporate thievery. As Travis Hoium highlights, Sinovel bribed a disgruntled AS employee to hand over secret source code that allowed it to dump it as a supplier completely. The problem for Sinovel is AS was able to fairly easily follow the trail back to its employee -- who crumbled right away and pointed his finger at Sinovel. Seems the Chinese company reneged on its payments for his corporate espionage.
American Superconductor is suing Sinovel, but with few assets in the U.S. it could be out of reach -- unless China steps up and ensures justice is served. The likelihood of that happening is slim, though, since it seems to revel in its companies' using whatever means necessary to give it a competitive edge in the global marketplace.
For investors, it's a cautionary tale of betting on a company that is almost wholly reliant upon one customer. But as much as AS's business has been decimated, it is expanding into the power-inverter business populated by Satcon Technology (Nasdaq: SATC ) and Power-One (Nasdaq: PWER ) , though their performance and prospects of late make that line of inquiry sketchy at best.
Alhtough 87% of the CAPS member rating AS think it will outperform the market, the low two-star rating they've assigned it suggests they also think there are better places for your money. Add the components maker to your watchlist, and then dig deeper on the American Superconductor CAPS page to see whether it can hit the fair-trade winds again.
With Europe stepping back from the brink by committing to do what's necessary to bail out its members -- not a bright prospect for European taxpayers, but it brings a certain stability -- industries with large exposure to the continent could heave a sigh of relief. Perhaps none more so than the auto parts industry, which is still trying to find its legs after the wreckage wrought by the financial collapse two years ago.
American Axle & Manufacturing and Meritor were just two that took comfort from the developments, including the better economic news on housing and confidence here at home. Meritor, in particular, derives 21% of its annual revenues from Europe. But they'll need to shore up domestic output too since automakers Ford (NYSE: F ) and General Motors have cut back their predictions for annual sales to around 13 million units. Industry analysts are glummer than that, suggesting 12.6 million units to be sold this year.
Wall Street is almost unanimous in its belief Meritor can top the indexes, but the CAPS community is a little more circumspect, with just 70% agreeing with that cheery view. Tell us in the comments section below or on the Meritor CAPS page whether you think it can still rev its engines, and then add the auto parts supplier to your watchlist.
A betting man
While analysts think a supply agreement between Universal Display (Nasdaq: PANL ) and LG Display is in the cards, we won't be seeing a signed contract anytime soon. LG, which makes thin film transistor-liquid crystal displays for notebook and desktop computer monitors, TVs, and mobile phones, would like to put Universal's OLED technology to good use. The tag-team duo would make a formidable competitive alliance.
Shares of LG have been cut in half since the start of the year and are down 38% in the last three months alone. Although it's expected to turn profitable next year, analysts still think the display maker will see earnings decline in the long run.
As CAPS member paradiz sees it, LG is "grossly undervalued" because of the "negative forecast of TV sales." Our CAPS participant adds: "Upside is they make screens for iPad LCD panel."
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.