Why Alliance Fiber Optic, Walter Energy, and Cree Are Today's 3 Best Stocks

The S&P 500 ends the holiday-shortened week on a high note as Alliance Fiber Optic, Walter Energy, and Cree shine to the upside.

Jul 3, 2014 at 5:15PM

Today may have only been a half day for the market, but we were absolutely inundated with economic data that was pushed forward by tomorrow's July 4th holiday.


No report pushed the broad-based S&P 500 (SNPINDEX:^GSPC) higher more than the nonfarm payroll figures for June. According to the U.S. Labor Department's early morning data release, nonfarm payroll employment rose by 288,000 in June, which was significantly higher than the range offered by economists of between 210,000 and 230,000. It also echoed the strength from yesterday's ADP private sector employment report. Because this number was so strong, and the labor force participation rate continues to dip over the long term, the U.S. unemployment rate ticked 0.2% lower, to 6.1%.

The monthly jobs report certainly overshadowed a relatively tame release of the initial weekly jobless claims data, which rose 2,000 from the prior week to a seasonally adjusted 315,000. Although investors would much prefer to never see this figure go up, a seasonally adjusted rate near 300,000 would certainly be conducive to slow, but steady, improvement in the jobs market, and would imply that the unemployed are having an easier time finding and keeping work.

ISM Services for June was also released this morning, and came in with a reading of 56 compared to May's reading of 56.3. This slight dip shouldn't be too surprising, as we witnessed slower expansion in the Chicago PMI earlier this week; so a slight slowdown in the service sector isn't much cause for concern.

Finally, average hourly earnings for June matched Wall Street's projections, and rose 0.2%. They also rose 0.2% in May. Higher pay for workers is important because it could lead to more disposable income and higher consumer spending. Since U.S. GDP is so intricately tied to consumer spending, this steady hourly earnings rise could bode well for the U.S. economy.

By day's end, the broad-based S&P 500 had climbed to yet another all-time closing high, rising 10.82 points (0.55%) to end at 1,985.44. The psychological 2,000 mark is now well within reach.


Source: Barta IV, Flickr.

It may have just been a half day of trading, but small-cap fiber-optic components supplier Alliance Fiber Optic Products (NASDAQ:AFOP) came out to play with the big boys, rising 7.5% after research firm Sidoti initiated coverage on the company with a buy rating and a price target of $28, implying as much as 51% upside based on yesterday's closing price.

Alliance Fiber Optic is a company I once held in my own portfolio, and I can tell you from firsthand experience, its quarterly results have regularly blown away what few Wall Street estimates have been out there for nearly two years. As telecom providers and businesses with big data centers look to build out their infrastructure both in the U.S. and in overseas markets like China, Alliance Fiber Optic will be there to benefit. With a double-digit five-year top-line growth expectation, and a forward P/E of less than 15, I'd say shares still look relatively inexpensive.

Following closely behind Alliance Fiber Optic is metallurgical coal miner Walter Energy (NASDAQOTH:WLTGQ), which extended yesterday's gains by tacking on another 6.9%. What's odd about Walter Energy's move higher is that it comes after Standard & Poor's cut its corporate credit rating down to CCC+ from B-, due to what it believes are unsustainable debt levels given low metallurgical coal prices and reduced production expectations.

Source: Walter Energy.

On the other hand, bargain investors who remember that Walter traded at close to $140/share just three years ago anticipate quite the bargain could be had by purchasing shares here. While I'm a personal fan of the coal sector, Walter Energy is not a company I'd consider a strong buy here. Its high debt levels are worrisome, and I personally foresee thermal coal prices stabilizing long before met coal does. Obviously, the coal sector isn't going to disappear anytime soon; but if met coal, which is used to strengthen steel, can't find traction in this economic environment, then it might be best to avoid Walter Energy altogether for the time being.


Source: Cree.

Lastly, LED lighting specialist Cree (NASDAQ:CREE) shot higher by 5% after research firm Oppenheimer upgraded Cree to a buy, and boosted its price target to $59 from $52, implying as much as 17% upside to shares based on yesterday's closing price. Specifically, Oppenheimer pointed out Cree's operating leverage and strong management team, which it believes makes the company a solid long-term play in the LED space.

While I can appreciate Oppenheimer's opinion, and would certainly agree that Cree has double-digit top-line growth potential during the next couple of years, I also believe that investors have more than priced that opportunity into Cree's shares. Furthermore, Cree has proven in the past to be somewhat inconsistent around earnings time, which makes its forward P/E of 27 appear all-the-more scary. Like Walter Energy, Cree is a stock I'd suggest watching safely from the sidelines.

These three stocks may have soared today, but keeping pace with this recent purchase by Warren Buffett could prove impossible 
Imagine a company that rents a very specific and valuable piece of machinery for $41,000 per hour. (That's almost as much as the average American makes in a year!) And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report details this company that already has more than 50% market share. Just click HERE to discover more about this industry-leading stock... and join Buffett in his quest for a veritable landslide of profits!

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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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