The World Isn't Turning Upside Down

The latest rally in stocks has captured everyone's attention. Yet while recoveries in a lot of out-of-favor stocks may look totally ridiculous, you shouldn't overlook a lot of higher-quality companies that have also seen their shares rise substantially.

It's hard for long-term investors to understand why some companies have rallied so strongly, both from November's lows as well as during the more recent bounce over the past two months. Banks like Citigroup and Bank of America still face major challenges, and despite some signs that the economy's fall may be starting to decelerate, it's far from certain that we've even hit bottom yet, let alone started climbing back toward pre-recession levels of activity.

A robust rally raises all ships
Nevertheless, companies that seemingly have no business emerging from their bear market funk have done exactly that. Take a look at some of these much-maligned stocks, all of which earned the lowest 1-star rating from our Motley Fool CAPS community:

Source: Yahoo! Finance, Motley Fool CAPS.

You can understand why many investors haven't liked these companies, especially during the recession. Brinker's eateries are a luxury many families can't afford when money's tight. Despite a few glimmers of hope in recent weeks, statistics on housing still suggest that home prices may still be looking for a bottom, and so neither homebuilders such as D.R. Horton nor companies that sell home furnishings sound like great prospects. And retailers like Foot Locker have had to close stores and strap themselves in for an economic roller-coaster ride.

In large part, it's the performance of these ill-liked companies -- ones whose prospects skeptics will still question even once the economy recovers -- that people are focusing on as casting doubt on the validity of the entire rally. But to that theory, you have to ask whether higher-quality companies are also bouncing back.

Better bouncers
Luckily, the answer is yes. When you look at CAPS favorites like those below, you'll see plenty of well-liked companies seeing similar bounces.

Source: Yahoo! Finance, Motley Fool CAPS.

At least with these companies, you can point to fundamentals that are already helping out their business models. With copper and other metals prices starting to pick up, miners like Freeport can expect an end to painful writedowns in the future. Similarly, alternative energy companies like Suntech are sensitive to energy prices, which have perked up lately. Even emerging markets, which also got hit hard during the bear market, have recovered some of their lost luster.

Positive feedback
The important thing to realize about the rally is that when the recovery comes, it will be the result of many small positive influences like these, coming together and combining into a snowballing force that restores overall economic growth. Just as most people -- even extremely intelligent market analysts -- grossly underestimated the eventual impact of the subprime mortgage problem that eventually ballooned into the financial crisis, so too are most people slow to recognize the signs of recovery when they first appear.

Of course, there may well be bumps along the way. The signs of activity we've seen may be statistical anomalies or outliers.

But in my eyes, it's a promising sign that we're not just seeing beaten-down companies with huge problems making a dead-cat bounce. The fact that we're also seeing investors bidding up shares of companies with real, tangible, and visible future prospects gives me confidence that the economy will recover -- if not now, then eventually, and with considerable force.

For more on investing in a topsy-turvy world:

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• Following Buffett may be the wrong move.
• Why not buy stocks that will love you back?