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The Dow Jones Industrial Average jumped almost 100 points Friday as the probability of Spain's banks getting bailed out grew, capping off its best week of the year. While I see all this eventually ending badly, some stocks were going even higher, strapping on rocket packs and turning in double-digit percent increases.
But resist the urge to high-five everyone in the cubicles next to you. Smart investors won't celebrate until they know why their stock surged, because without a fundamental basis for the bounce, these stocks can quickly make the return trip down.
Let's see, losses of $0.03 per share when analysts were expecting profits of $0.08, lower prices than the year-ago period, and higher input costs lead to a 15% jump in Exide Technologies' (Nasdaq: XIDE ) stock? Of course!
The traditional battery maker is in the midst of a turnaround that's seeing it shed excess capacity, ridding itself of New Zealand recycling centers and tackling a somewhat bloated overhead. The operational issues that dragged on performance are being addressed piece-wise. Whereas battery maker A123 Systems (Nasdaq: AONE ) is teetering at the edge as the electric car market immolates, Exide seems to have turned the corner with the broader auto industry. While it still has a lot of debt to address, it has $155 million in cash, similar in amount to its revolving credit line, and should pad that with $45 million from the sale of its Frisco recycling plant.
Part of Exide's jump-start was that it saw much higher revenues than what Wall Street was anticipating. After sluggish auto industry growth and a warm winter that stalled replacement battery sales -- cold weather tends to cause more failures -- both U.S. and foreign carmakers are revving their engines. Ford (Nasdaq: F ) reports production lines are maxed out and U.S. sales from all carmakers, including Japan's Toyota, Honda, and Nissan, which reported exceptionally strong gains, were up 26%. BMW, one of Exide's biggest OEMs, saw sales jump 7.3% in May and they're up 13.8% year to date.
Earlier this year I bet Exide's turnaround efforts would pay off, and while I was a bit premature in that hope as third-quarter results showed it's going to be a long process, the fourth-quarter numbers suggest the restructuring is gaining traction and I'm looking forward to its outperforming the broad indexes on the stock-tracking service Motley Fool CAPS.
Squeezed to death
The current thinking is that since Facebook's (NYSE: FB ) stock has dropped precipitously since its debut, it was a failed IPO. While there were some problems at the outset and definitely some irregularities that are being investigated, the public launch of the company actually netted Facebook the maximum amount of money it could have possibly gained, which is the purpose of an IPO, so I view it as something of a success.
But as they say, perception is reality, and when the heavyweight social-networking stock gets pummeled, it's going to drain similarly situated stocks. Recently IPO'd social sites such as Yelp (Nasdaq: YELP ) , Groupon, and even LinkedIn have seen their shares fall under the weight of Facebook's decline. They may have other issues also working against them -- LinkedIn, for example, is dealing with 6.5 million passwords being hacked -- but they'll need to work against another perception, that social-networking IPOs are a fad.
Yelp is emblematic of a company that struck while social networking was hot, and after more than doubling in value from its $15 IPO price, has struggled to keep its head above that low-water mark. It jumped 12% Friday on no discernable news other than that Facebook managed to temporarily reverse course.
Yelp put together three days of solid gains, but analysts think it's more of a short squeeze play than anything the company is doing, such as launching a site in Finland. It has 16% of its float sold short and the rally could be a sign of them covering their bets.
Like LinkedIn, it has other issues to deal with (though not hacking). It is highly dependent on Google for more than half of its traffic but has noted the search king has a penchant for removing links to Yelp's site and redirecting them with links to its own competing products. As Google tries to grow its own social-networking sites such as Google+, look for that to happen more and more.
Although I've operated under the belief that Yelp and the others aren't much more than fads that don't deserve the valuations they've been assigned by the market, I hadn't indicated that premise on CAPS -- until now. Using the three-day rally in Yelp's stock price as a launching point, I'm rating it to underperform the market on CAPS, joining with the overwhelming majority of raters. Of the 280 CAPS members rating Yelp, less than 10% see it being able to beat the Street.
Need help that's not Yelp?
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