More Than Momentum: Stocks Rising for a Reason

Even on the market's worst days, buyout news and other short-term forces can send individual stocks up by 10%, 25%, even 50%.

For example, student loan servicer First Marblehead’s (NYSE: FMD  ) shares soared 71% Monday when the company announced that a unit of Goldman Sachs (NYSE: GS  ) completed a $132.7 million cash investment in the company.

But beyond less-predictable events like that one are stocks with fundamentally compelling reasons for recent momentum. The trick is to find those stocks. That's where Motley Fool CAPS comes in.

The story behind the story
CAPS is no crowd of lemmings. Its best-performing members' opinions do more to shape each company's rating than the picks of their poorer-performing peers. Let's use the collective wisdom of more than 115,000 CAPS members to filter out the noise and find companies offering strong momentum.

We'll use CAPS' handy stock screening tool to quickly zero in on companies with a stock price increase of at least 30% in the past four weeks, a market cap of greater than $100 million, and a beta of less than 3.

Here's a sample of stocks our CAPS screen returned:

Company

CAPS Rating
(Out of 5)

Four-Week
Price Change

Mueller Water Products (NYSE: MWA  )

*****

38.5%

Ctrip.com (Nasdaq: CTRP  )

*****

30.0%

Select Comfort

***

71.6%

Palm (Nasdaq: PALM  )

*

45.6%

Source: Motley Fool CAPS. Price return from July 18 through Aug. 15.

With our list of screened stocks pulled up in CAPS, it then only takes a single click on individual companies to get some context behind the recent momentum.

Being water-wise
Mueller Water, the 2006 spinoff from Walter Industries, has seen its profits and share price struggling this year as the effects from the falling housing market that have hit the likes of Home Depot (NYSE: HD  ) trickled down into its business as well. Fiscal third-quarter earnings just released have shown some improvements in Mueller's business lines, though, with increased volume seen in two of its three business units and price increases helping the company achieve a 5% boost in net sales.

Cost-cutting initiatives and other internal efforts helped the company report net income per share of $0.18 compared with a loss of $0.01 a year ago. But while shares have surged following the quarterly numbers, Mueller's management still gave a cautious outlook moving forward, noting that high raw-material costs and a weak residential construction market could put near-term pressure on the business. Still, CAPS members have largely maintained their five-star opinion of Mueller Water; they see the lower share price as a long-term opportunity. As such, more than 96% of the 846 CAPS members rating Mueller Water Products expect it to outperform the market.

Taking a long Ctrip
China's leading online travel website, Ctrip.com, has blown away analyst expectations in each of the past six quarters, and this quarter was no exception. A 44% increase in air ticketing revenue helped Ctrip.com's earnings grow 35% to $0.25 per share in the past three months, when Wall Street was expecting $0.20 per share. For the current quarter, however, Ctrip sees only 15% to 20% revenue growth but it wasn't enough to stop shares from surging following the report. 

Ctrip.com and fellow Chinese company Baidu.com (Nasdaq: BIDU  ) have continued to capitalize on the rapid growth in the Chinese economy. But on top of strong revenue growth, both have managed their companies well and posted stellar double- digit returnn on equity and returns on capital over the past few years. Despite recent volatility in the broader Chinese market, many investors see well-run companies such as Ctrip.com as a great long-term investment. More than 96% of the 4,266 CAPS members rating Ctrip.com have given the company the thumbs-up too; they expect the stock to outperform the S&P going forward.

And you?
What's your story? Whether you buy the tale of a stock that's soaring or souring, your own research is more important than collective opinions. But these collective opinions can make your due diligence a whole lot easier.

Add your take on these or any of the 5,500 stocks that our 115,000-plus investors have covered in Motley Fool CAPS. It's totally free to be a part of the community, and the payback is more than worth it.

The Motley Fool Hidden Gems service looks for companies like Ctrip.com, which it recommended to subscribers, with exceptional management and growth prospects. Check out what other gems lead analysts Tom Gardner and Bill Mann are recommending today with a free 30-day trial to the service.

Fool contributor Dave Mock has his own story, but there's no "happily ever after" at the end of it. He owns no shares of companies mentioned here and is the author of The Qualcomm Equation. Home Depot and First Marblehead are Inside Value picks. Baidu.com is a Rule Breakers recommendation. The Fool's disclosure policy has the momentum of a freight train but can stop on a dime.


Read/Post Comments (5) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 19, 2008, at 6:37 PM, portfolioburn wrote:

    Didn't the Motley Fool call Palm "the worst stock on the planet" just 4 weeks ago and now it's up 50.00% over the same period.

    By the way, the Motley Fool keeps showing that 6 month Palm chart v. S&P 500, that "selloff" in Palm in October was a Dividend distribution of 9.00 per share stemming from the Leveraged Recapitalization Palm did with Elevation Partners. That chart is misleading and it is the 2nd time this month that chart has been used. Dividends forced the price per share lower than is true, however, the total return of Palm is not down 40.00% of the last 6 months. Take 7.80 and add 9.00 bucks and you will see that Palm's total return is well above the S&P 500 over that time period. Stop being a fool. I thought Palm would buy your portfolio. Guess not.

  • Report this Comment On August 20, 2008, at 11:29 AM, Nervey wrote:

    Funny, CTRIP was called a stock to sell off my a MF contributor just a few weeks ago. I'm glad I held on to mine and I will for a long time...

  • Report this Comment On August 20, 2008, at 11:45 AM, portfolioburn wrote:

    If you took the Motley Fool seriously, the only two stocks you would own are Apple and Rimm, I couldn't pick two worst stocks to owe right now, valuations are extremely rich.

  • Report this Comment On August 20, 2008, at 2:35 PM, portfolioburn wrote:

    "CAPS is no crowd of lemmings. Its best-performing members' opinions do more to shape each company's rating than the picks of their poorer-performing peers. Let's use the collective wisdom of more than 115,000 CAPS members to filter out the noise and find companies offering strong momentum"

    Just 110,000 members of CAPS members are complete suckers, just 97% of them, but not all of them.

  • Report this Comment On August 20, 2008, at 2:36 PM, portfolioburn wrote:

    However, the motley fool is slightly better than the complete morons at the street.com

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