European ministers continued fixing their financial house, giving encouragement to rattled markets. Yet 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)
|Abraxas Petroleum (Nasdaq: AXAS )||****||28.0%|
|Ruth's Hospitality Group (Nasdaq: RUTH )||**||15.7%|
|MGIC Investment (NYSE: MTG )||**||14.0%|
Even with the Dow Jones Industrial Average (INDEX: ^DJI) soaring 330 points on Columbus Day, or 3%, stocks that went appreciably higher are pretty big deals.
No dry hole here
Don't you just love it when you're able to punch a gaping hole in an analyst's thesis? Just last week, a passel of analyst downgrades hit the oil and gas exploration industry, sending stocks in the space lower. Abraxas Petroleum, Clayton Williams Energy (Nasdaq: CWEI ) , and Endeavour International (NYSE: END ) were among the stocks in the analytical crosshairs.
As if on cue, though, the E&P players thumbed their collective nose and staged a big rally yesterday, with Abraxas leading the charge. Clayton Williams was also up 14%, Endeavor jumped 10%, and Pioneer Drilling (NYSE: PDC ) , which is being targeted by short sellers, soared 15%. Revenge is sweet.
The problem with such broad-based moves when analysts see fundamental concerns with the industry is that the gains are likely to be short-lived. Highly rated CAPS All-Star member redebut was expecting a rebound in Abraxas' share price because he believed the industry had been beaten down too much over the past month.
Certainly, the investor community is with him on this one, as more than 96% of the members weighing in think Abraxas will outperform the broad market averages. Add the E&P play to your watchlist if you're interested in learning more about its progress as well as getting closer to the opinions of other investors on the Abraxas Petroleum CAPS page.
Did investors decide that diners suddenly wanted to overpay for a steak again? That doesn't seem to be the reason to account for the run-up in share price of high-end steak house Ruth's Hospitality Group, as rival Morton's Restaurant Group rose less than the market did.
Last month, the market researchers at NPD Group reported the restaurant industry's recovery came to a grinding halt in the second quarter, reversing a trend that began last year. It found that visits to restaurants fell 0.4% compared to the year ago period, ending a three-quarter run of rising numbers of visits. With unemployment north of 9%, high energy prices, and consumer confidence being buffeted, it's not surprising that people are less willing to dine out.
The Ruth's Chris chain, focusing on the high end of the market, is going to feel it, too, and investors should expect the gains it made yesterday to be ephemeral. Indeed, its stock opened down more than 5%.
Earlier this year, I had marked Ruth's to outperform as the restaurant rebound was gaining traction, but I just closed out my pick as the economy slides further downward. You can tell us in the comments section below or on the Ruth's Hospitality Group CAPS page whether you think it will be feast or famine here, and add it to your watchlist to be notified if it becomes an all-you-can-eat buffet.
Like the E&P sector above, the mortgage insurance business enjoyed a sector jump yesterday, with MGIC Investment and Radian Group both climbing 18%. With mortgage rates at record lows, if the housing industry wasn't such a shambles it actually might be a period of growth for mortgage insurers, but I'm fairly certain the gains will be just as transient.
CAPS members aren't very hopeful, either, as a group, as only 60% of those rating MGIC think it will outperform the broad market averages. All-Stars are a more dour bunch, as fewer than half think it can beat the Street. Let us know on the MGIC Investment CAPS page if you believe the mortgage insurer can still insure its own survival, and then add the stock to the Fool's free portfolio tracker to keep track of its progress.