5 Stocks on Fire

There are many reasons why the price of a stock can have a big move upward in just seven days. Whatever is behind it, a surge in the price of a stock is an alarm. It's a bit like hearing a cheer. Upon further investigation, it might turn out to be nothing -- but it could be a major event.

The question to ask is: Has something materially changed within a company to radically alter its desirability as an investment? Let's attempt to answer that for some stocks seeing recent upward price action.

To help, we'll enlist the 115,000-plus members of our Motley Fool CAPS community. Stocks are rated from one to the maximum five stars by CAPS. So far, our data has shown that five-star stocks have seriously outperformed the market.

Without further ado, here are some of this week's biggest movers:

Source: Motley Fool CAPS and Yahoo! Finance.
*Price change between Sept. 18 and Sept. 25.

These companies are not recommendations, but rather a starting point for further research. Here’s the story behind some of this week’s movers.

Hepatitis drug is looking good
Shares of Vertex, a four-star drugmaker, took off this week when it announced positive study results for its hepatitis C drug, Telaprevir. The drug could be a significant advance in the treatment of the disease, which currently affects an estimated 170 million people worldwide.

On the negative side, the company is still losing money, and just raised another $220 million with its third equity offering since 2006. The offerings dilute shareholdings, but the company needs cash to continue development of Telaprevir and other promising drugs. Telaprevir, its major drug nearest FDA approval, is still probably at least a year away from coming to market. The drug also faces competition from rival hepatitis drugs being developed, including one by Johnson & Johnson (NYSE:JNJ) and Medivir. 

CAPS All-Star genedom had this to say about the company a year ago. "A 5-billion dollar company with the drug approval two years away is too pricey for me. Not to mention anything can happen in phase III trial."

Everyone’s wearing defense this year
A defensive stock in a defensive industry may be just what the doctor ordered for this market. That must have been what Credit Suisse had in mind this week when analysts upgraded Novartis to neutral, primarily citing the company’s defensive qualities. Consequently, the stock rallied in the midst of a tough market.

This five-star CAPS-rated company does have some impressive defensive attributes. It’s relatively cheap, selling at just over 10 times earnings. It has a very small beta of 0.12. And the stock currently pays a solid dividend of 2.7%. The dividend appears to be solid because the company has just a 13% payout ratio.

A low stock price makes a tempting meal
Secure Computing is being acquired by McAfee for $5.75 per share, a 27% premium to last Friday’s close. Secure Computing is a five-star CAPS stock that had fallen in price from over $10 per share less than a year ago to near $4 recently. While the company had some promising technologies, it had problems getting its financial house in order. It seems the price was right for McAfee, the second-largest security software maker, to acquire Secure Computing in an effort to become still more competitive in the industry. Symantec (NASDAQ:SYMC) currently has the No. 1 spot.

Computer security is obviously a field that is here to stay. But McAfee is selling at a pricey 38 times earnings and is currently rated just two stars by CAPS members.

Final thoughts
Stock prices often move higher for a reason. These did. But it pays to make sure you understand what's going on so you can tell the difference between a temporary fluke and the signal of a new trend?

That's where CAPS can help. Our 115,000-plus members are on top of many of these situations. You can check out what they have to say, do some research of your own, and contribute your own thoughts. Let us know what you think about this week's movers. Our members are waiting to hear what you have to say. CAPS is 100% free, so get started today.