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, after reporting stronger-than-expected drilling results in its North Dakota Bakken shale, Continental Resources (NYSE: CLR  ) saw its stock soar 23% in a single day.

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 investors' opinions do more to shape each company's rating than the picks of their poorer-performing peers do. Let's use the collective wisdom of more than 105,000 CAPS investors 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 20% in the past four weeks, a market cap of greater than $100 million, and a beta of less than 3. That'll keep us clear of the wild, pump-and-dump land of penny stocks.

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

Company

CAPS Rating
(out of 5)

Four-Week
Price Change

McDermott International (NYSE: MDR  )

*****

22.9%

Chemical & Mining Co. of Chile (NYSE: SQM  )

*****

60.6%

Zoltek (Nasdaq: ZOLT  )

***

23.5%

Dell (Nasdaq: DELL  )

**

24.7%

Shuffle Master (Nasdaq: SHFL  )

**

28.7%

Return data is calculated as the difference between the closing price on May 12 and the closing price on June 9, per Yahoo! Finance. Star rankings from CAPS.

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

Dell's bells
It's been a couple of tough years for Dell, but the market was pleasantly surprised by the computer maker's first-quarter earnings report, which signaled a potential new trend taking hold. On top of improving net income by 12% when the analysts expected a big zero in bottom-line growth, Dell also sported above-market unit growth in several segments. In fact, research firm IDC estimated that Dell outpaced the overall market growth rate by 1.4 times in Q1 2008 unit shipments, in nearly all PC segments.

Dell has been getting its operations in order, even while it observes the opportunity to regain market share from leader Hewlett-Packard (NYSE: HPQ  ) . Among the things this new Dell is doing differently include simplifying product configurations and downsizing manufacturing operations.

But even though results in the latest quarter helped shares bounce off their recent bottom, not all investors are convinced that Dell's future is bright. The CAPS community still holds Dell at a two-star rating, where it has been for at least six months. Overall, 70% of the 4,945 investors rating the company expect Dell to outperform the market, but that leaves the rest still holding a bearish opinion on the stock.

Fertile ground
The world's largest producer of potassium nitrate, iodine, and lithium carbonate, Chemical and Mining Co. of Chile -- also called Soquimich -- provides the raw materials for both the fertilizer and energy-storage markets, and those are two of the hottest markets going. The worldwide agricultural boom has increased demand for nitrate-based fertilizer products, and lithium is the preferred chemistry for many batteries -- a potentially big sector, when you consider that many expect the electric cars of the future to be powered by lithium-ion cells.

Soquimich is reaping the benefits of higher demand for fertilizer, with favorable pricing more than offsetting the rising energy and raw-material costs associated with production. The company is also moving to take advantage of one of the world's most important fertilizer markets by forming a joint venture with Migao for the production and distribution of potassium nitrate in China.

High-margin revenue from the increase in fertilizer sales has already made Soquimich a stock that many investors wish they had bought, but there's a future even beyond fertilizer in Chile. With the U.S. Geological Survey estimating that 75% of the world's lithium reserves are located in Chile, Soquimich is in the catbird seat at the head of this supply chain. So in case the fertilizer megatrend fizzles out, there's another potential one in the wings, with battery-powered automobiles. No surprise, then, that 632 of the 653 CAPS investors rating Soquimich believe it will continue to outpace the market.

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 5,700 stocks that our 105,000-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 Inside Value service looks for value in beaten-down shares of companies like Dell. To see what other companies the analyst team believes are priced below intrinsic value, take a free 30-day trial.

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. Dell is an Inside Value recommendation. The Fool's disclosure policy has the momentum of a freight train but can stop on a dime.


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  • Report this Comment On June 17, 2008, at 5:51 PM, confuciusd wrote:

    CAPS was a little late on the Continental boat to be advertising it with this big winner stock.

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