Whoa! These Stocks Just Took Off!

Oh, here's a shock: There are still financial troubles in Europe and Spain rattled the cage by delaying a decision on whether it will take a bailout from the EU. The market didn't like the nerve-rattling uncertainty that projected and promptly took a tumble. Still, not every stock felt the need to be so dour, and some even rose by double-digit percentages.

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 could just as quickly make the return trip down.

Not as rich as you think
Nothing like an article in The Wall Street Journal highlighting your shortcomings to send your stock into a tizzy. BP Prudhoe Bay Royalty Trust (NYSE: BPT  ) got less than the royal treatment when the business journal highlighted what should be known to investors in such vehicles: The trusts have a finite lifespan and are a source of diminishing returns the closer one gets to its dissolution. As the Journal pointed out, the current value of BP Prudhoe Bay's future cash available for distributions was $1.4 billion, yet it carried a market value of $2.3 billion: "That means investors remain willing to pay 61% more for a stake in the BP trust than all its future cash flows are likely to be worth."

Published on a Saturday, the effect was a sustained decline in the royalty trust's shares all week long, falling from Friday's close of $108.87 to Thursday's low of $76.77, a 30% drop in value. At a market value of $1.9 billion now after Friday's recovery, it trades at a much smaller premium to what its assets are worth. There's always the possibility technological advances will improve the ability to extract additional resources, extending the shelf life of the trust, but for investors who were enamored of the high yield from this and other royalty trusts, it once again shows the risks involved of chasing just one metric.

Music to your ears?
Online music service Pandora Media (NYSE: P  ) wasn't fighting off a week's worth of dour news, but rather a cacophony of doubt ever since its IPO last year. A surprise breakeven quarter lifted the company as mobile advertising revenue increased 86% from the year ago period to $53 million, giving a hint that its ad-based revenue model was sustainable.

Earlier this year, Microsoft (Nasdaq: MSFT  ) was willing to pay $1 billion to AOL (NYSE: AOL  ) for 800 patents relating to online advertising on mobile handsets, so it's not that the niche doesn't have its backers. Yet as I noted this week, a new study published in AdWeek found that more than half of all online ads can be seen on a page for less than one second. AdSafe Media, the company that conducted the study, said the industry is using skewed tools to count "viewable impressions." It may just be online ads as a model isn't not so sustainable after all.

As has been a problem for Pandora all along, though, content acquisition costs continue to rise and were up 79% in the current quarter compared with a 51% increase in revenues. Losses widened in the quarter, and while many point to adjusted earnings as making the period breakeven, those "adjustments" were solely on stock options, which I'd argue are a continue business expense and not a one-time adjustment. So I won't be changing my underperform rating on Motley Fool CAPS anytime soon, but let me know in the comments section below if I have a tin ear for how Pandora is progressing.

Pulling the rug out
Biotech Geron (Nasdaq: GERN  ) was perhaps the one stock rising for a reason, as an analyst offered a positive outlook on the cancer therapies it's developing, but the stock has been on the move for awhile now (up 60% over the past month) after a positive review two weeks ago on Seeking Alpha. I said at the time the treatments hold a lot of promise, but the results of midstage trials have some time to go before we see the actual outcome, so the spike in its shares now seems a bit premature. I'd say the same for the current run-up based on the rosy view offered up by the Wall Street analyst.

I agree with CAPS All-Star TSIF that at lower valuations a bet on the biotech made sense, but at current prices it's due for a pullback. But tell us below in the comments box if it still makes sense to get in on Geron now before it progresses much further.

Whoa, Nelly!
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Fool contributor Rich Duprey holds no position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of Microsoft. Motley Fool newsletter services have recommended buying shares of Microsoft and creating a synthetic covered call position in Microsoft. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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  • Report this Comment On September 02, 2012, at 1:08 PM, longhornital wrote:

    I was under the impression a Canadian trust isn't 'fixed' and could be extended by acquiring new assets.

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