More Than Momentum: Stocks Rising for a Reason

Even on the market's worst days, headlines and ticker feeds tout soaring stocks. Some juicy rumor or biotech wonder drug seems to be reason enough for a stock to climb 10%, 25%, even 50% -- sometimes in a single day. Sometimes the companies are familiar, but many are entirely unknown to investors.

Often, news of a recent buyout offer that investors didn't anticipate sends a stock soaring. For instance, shares of regional wireless service provider Dobson Communications (NASDAQ:DCEL) jumped almost 12% when AT&T (NYSE:T) agreed to buy the company for $2.8 billion last week. But beyond these somewhat unpredictable surges, the market holds stocks with a fundamentally compelling story behind their recent momentum. The difficulty comes in sifting through the daily trading and news-driven gyrations to find them.

Luckily, there's help right at your fingertips. The Motley Fool CAPS system is a great tool not only for finding and screening stocks, but also for getting a quick read on the fundamental stories behind them. In addition, investors can quickly see just who -- from the big names on Wall Street to the regular Joes on Main Street -- is bullish or bearish on the company, and why.

The story behind the story
Let's dig right in, using the collective wisdom of more than 50,000 CAPS investors to look past the splashy news and find companies showing strong recent momentum.

CAPS contains a searchable record of investors' opinions and comments about a company's fundamentals, value, and prospects at any given time. A company's star ranking also has a history, showing whether it has been rising or falling in the investing community's favor. In addition, the CAPS system weights the opinions of the best-performing investors more heavily; a company's ranking is influenced more strongly by investors who have already proved themselves better than the average dart-throwing monkey.

We'll screen for stocks showing at least 30% price appreciation in the past month. Then we'll weed out stocks with less than $100 million market capitalization, and those with a beta greater than 3. This will help keep us out of the wild, pump-and-dump land of penny stocks. Here's a broad sampling of stocks that our screen returned today:

Now let's sift further through this list of stocks that have thumped the market over the past month, and find out why they've performed so well.

The method behind the madness
Texas-based chemical manufacturer KMG Chemical's shares jumped enormously over the past month, thanks to strong third-quarter earnings reported in early June. Overall, revenue soared 33% to $28 million, and sales of the company's animal health operating segment, which includes insecticides for cattle, jumped by 96%.

CAPS players like to see this kind of growth from a company with a strong balance sheet and a boring line of products. In fact, 57 of the 59 CAPS All-Stars rating the company think the chemical producer will beat the S&P going forward. But a change in the CEO role, as well as chairman David Hatcher's plan to sell almost one-fourth of his ownership in the company, have at least a few CAPS investors bearish on the company at present.

Drug-delivery-system manufacturer SurModics saw its stock soar recently after the company signed a licensing and development agreement with pharmaceutical giant Merck (NYSE:MRK). The agreement includes a $20 million up-front license fee to SurModics, and the potential for $288 million more if its technique for delivering drugs to the eye meets certain development and regulatory milestones.

Even with the recent windfall, though, some CAPS investors doubt the company's chances of beating the market. Almost 20% of CAPS investors aren't convinced the new market initiatives will bear fruit, and they've given the stock the thumbs-down. 

Research Frontiers occupies the bottom of our list. It's developing suspended particle technology for a plethora of optical applications. The company's "smart glass" technology controls the amount of light passing though a glass or plastic surface. While shares of the company have soared more than 160% already this year, the bottom line is that many investors are wary of a $214 million firm that still shows little revenue and no profits. CAPS players are overwhelmingly pessimistic about Research Frontiers -- there are three bears for every bull, and a staggering 81 of 91 All-Star CAPS investors rating the stock think it will underperform the general market going forward.

What's your story?
Ultimately, the only story that counts is your own. Whether or not you buy the story of a soaring or souring stock, your own research is more important than collective opinions. But thankfully, these collective opinions can make our individual due diligence that much easier.

So step right up and chime in with your own take on these or any of the more than 4,700 stocks covered in Motley Fool CAPS. It's totally free, and the payback is more than worth it.

Merck was picked by the Motley Fool Income Investor service in 2004 for its high yield and growth potential. To learn what other stocks make the grade today, take a free 30-day trial of the service.

Fool contributor Dave Mock has his own story, but won't bore you with the details. He owns no shares of companies mentioned here. Dave is the author of The Qualcomm Equation. The Fool's disclosure policy has the momentum of a freight train, but can stop on a dime.