The markets roared back to life yesterday on better housing numbers and a successful Spanish bond auction. Just because your stock strapped on a rocket pack and went 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.
(out of 5)
|BioTime (AMEX: BTX )
|Jefferies Group (NYSE: JEF )
|Hovnanian (NYSE: HOV )
Source: Motley Fool CAPS.
The Dow soared 337 points yesterday, or almost 3%, so stocks that went appreciably higher are pretty big deals.
Biomedical research specialist BioTime is riding a wave of good fortune higher as it announced last week that it and its subsidiary would be developing a simple blood test that could detect most cancers, which was followed by one analyst upgrading the stock to a "strong buy."
BioTime is typically focused on regenerative medicine and blood plasma volume expanders through stem cell technologies. Yet recently, Geron's (Nasdaq: GERN ) decision to abandon stem cell research caught the market by surprise and caused some consternation about the future of the industry. If BioTime is successful, not only would it have a huge market opportunity available to it, but it would validate stem cell research further. That's because its cancer marker test arose out of its research into embryonic and induced pluripotent stem cells (stem cells that can turn into any type of embryonic or adult cell).
Blood plasma volume expanders might not offer enough catalysts to offset a bearish outlook for the company, but a test that requires only a simple antibody-based blood test is a different story. While three-quarters of the CAPS All-Stars rating BioTime had bought into the negative view, they might need to reassess its prospects in light of the new development.
Of course, announcing you're going to develop a test is one thing, bringing it to market is another. Tell us in the comments section below whether you think this is a mark of genius, and add BioTime to the Fool's free portfolio tracker.
Now we believe you
We might have seen this one coming. Ever since MF Global declared bankruptcy and it was discovered it may have played fast and loose with clients' money, investment banker Jefferies Group has been telling anyone who would listen it's not in the same category as the rogue trader. It had nowhere near the exposure to Europe's sovereign debt crisis that MF Global did, and its business remains sound, such that large investor Leucadia National (NYSE: LUK ) apparently hasn't abandoned it.
Yesterday's markets converged to bolster what Jefferies was saying, as it reported fourth-quarter earnings that showed revenues of $554 million (just under analyst expectations) and profits of $0.17 a share (ahead of Wall Street's $0.14 forecast). And while it has reduced its European exposure more than 82% since November, the European Central Bank's decision to inject nearly 490 billion euros into banks gave markets the confidence they needed at the right time.
CAPS All-Star DoubleAmerica looks at the relationship with Leucadia as a bellwether test of its viability:
Jefferies is one of Leucadia's largest holdings and Leucadia been increasing their position since June 30, when they already owned a little over 27% of the outstanding shares. Fairholme has initiated a position during the last quarter and is no stranger to investing alongside Leucadia. If there was some type of run on Jefferies I believe they would have strong support from some savvy investors.
You can add Jefferies to your watchlist to stay on top of its recovery, and you can share your thoughts on the Jefferies Group CAPS page. Also check out The Motley Fool's illuminating multipart dive into the MF Global fiasco.
A long-awaited recovery?
Stocks tied to the housing market, from Hovnanian to wallboard maker USG, were buoyed by the news that housing starts were up by the most they've been in nearly two years. It's certainly a welcome reprieve for builders like KB Home (NYSE: KBH ) and Toll Brothers (NYSE: TOL ) , but don't expect those gains to last. Housing is still fundamentally broken and won't improve anytime soon.
Evidence of that was revealed today by the National Association of Realtors, which lowered by 14% the number of houses sold over the past four years because a glitch in its system led to errors including double-counting of sales. Worse, foreclosures -- those that may yet occur as well as those that swept over the industry previously -- are still dragging housing down. Almost half of all home sales in November were either short sales or involved repossessed properties owned by banks.
I believe that until the industry faces the necessary day of reckoning, instead of pursuing failed programs like HAMP, housing won't be able to really jump-start its recovery, and builders will only be able to enjoy brief days in the sun, like Hovnanian did yesterday.
Only 28% of the CAPS All-Stars weighing in on the builder think it can beat the market anytime soon. The rest have just as bleak an outlook as I do, which is why I've rated Hovnanian to underperform for the next year or so. Tell us in the comments section below whether you agree the government needs to get out of the way for housing to recover, then add Hovnanian to your watchlist for updates on its progress.
Going into orbit
These three companies may have divergent futures despite their short-term bounces, so check out for free two companies The Motley Fool thinks have can't-fail futures. Hurry, though, because the free look is available for a limited time only.