Whoa! What Just Happened to My Stock?

Greece's default barely moved the markets at all. But if 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 in their stock 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 two stocks that just hit the afterburners, and see whether they're truly headed into orbit.

Stock

CAPS Rating
 (out of 5)

Friday's Change

Smith & Wesson Holding (Nasdaq: SWHC  ) *** 22.8%
Molycorp (NYSE: MCP  ) ** 18.9%

Source: Motley Fool CAPS.

Although well off its highs, the Dow ended up in positive territory Friday, rising 14 points; not bad considering what a sovereign default portends. So stocks that went appreciably higher are pretty big deals.

Guns a-blazin'
FBI background checks for firearms purchases have soared almost 64% since 2006, and so far in 2012, they're running 12% ahead of the pace set in the same period last year (which itself was up 17% from the year before). While the law enforcement agency says there's no one-to-one correlation between background checks and gun sales, one can still make the assumption that if more people are looking to buy guns, there are going to be more sales.

This would certainly seem to be borne out by the results posted last week by storied handgun maker Smith & Wesson Holding, which returned to profitability and shot holes through analyst expectations. With a 60% jump in its backlog, it seems all the gun permit applications are turning into demand. Sturm, Ruger (NYSE: RGR  ) saw an even bigger increase, with its backlog more than doubling, growing from $59 million in 2011 to $138 million at the start of February.

Having shed its perimeter security business, S&W's decision to sight in on its core gun operations is paying off. It was reminiscent of a number of big-name companies that thought they could capitalize on their brand and make it in security. Brink's foray into the home security business ended in it spinning off the unit into Broadview Security, which now operates as a subsidiary of Tyco's ADT Security Services division. Edison Security is also a part of ADT.

With its new, single-minded focus on firepower, CAPS member wowdwarf2 says S&W is cocked and loaded for greater gains:

Send Lawyers, Guns and Money. All of your nice stuff goes away very quickly without the ability to defend said stuff. "Those who would exchange freedoms for securities shall have neither." Ben Franklin

Add Smith & Wesson to the Fool's free portfolio tracker and take aim at what might trigger the next great growth spurt on the Smith & Wesson CAPS page.

A rare opportunity
The move by Molycorp to buy Canadian rare-earth elements processor Neo Material Technologies underscores the weak investment thesis for rival Rare Element Resources (AMEX: REE  ) , which apparently got an even bigger boost from the news, rising more than 20% Friday.

Neo processes rare earths at facilities in China and Thailand, giving Molycorp a gateway into the Orient. While China produces 90% of the world's rare-earth elements, it also consumes 70% of them. Molycorp is developing its mine in California and will ship the rare earths to Neo's plants for processing.

In contrast, Rare Element, Avalon Rare Metals, and others have years and years to go before they're ready to begin mining, if ever. Molycorp will have a running head start on these rivals and should capture a large share of the market as industry types try to diversify away from China to protect themselves from mercurial policy shifts like the decision to limit exports.

CAPS member sleepysb70 says the latest acquisition makes Molycorp a top-tier player:

With the purchase of Neo Materials, Molycorp will more than double there earnings and Neo has a proven track record with a global customer base. This is the 3rd aquisition this past year and probably not the last.

Tell us on the Molycorp CAPS page if the processing facilities are enough to make a go of it, then add it to your own watchlist to see how quickly it can pay off.

Going into orbit
These two companies may have divergent futures despite their short-term bounce, so check out the one stock The Motley Fool thinks will break all the rules to win. Hurry though, because the free look at the new report "Discover the Next Rule-Breaking Multibagger" is available for a limited time only.

Fool contributor Rich Duprey holds no position in any company mentioned. Click here to see his holdings and a short bio. Motley Fool newsletter services have recommended buying shares of Brink's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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