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Whoa! What Just Happened to My Stock?

By Rich Duprey - Apr 5, 2013 at 8:00PM

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These stocks bounced higher yesterday, but are they about to make a return trip to Earth?

Japan risks sparking sharply higher inflation, devaluation of its currency, and untenable debt levels by injecting trillions of dollars into its economy. The goal may be to revive it, but the real danger is that the whole charade collapses.

Analysts said Japan had to go big or go home, but by joining the central bankers of the U.S., Europe, and Great Britain in flooding its markets with massive amounts of cash, it has gone beyond even what they attempted, despite having an economy a fraction of the size. Although the Nikkei exchange closed at its highest level in four years in response to the stimulus, I just don't see this ending well.

The Dow Jones Industrial Average didn't seem to mind, tacking on 55 points, and breaking above the 14,600 level once again. It was a fairly broad-based rally, with as many as 60% of the stocks listed on major exchanges advancing; but there were some stocks that did even better than the Nikkei, surging by double-digit percentages. You should still resist the urge to high-five everyone in the cubicles next to you. Smart investors won't celebrate until they know why their stock surged, because, without a fundamental basis for the bounce, these stocks could just as quickly make the return trip down.

Going in reverse
Supplements maker Star Scientific (NASDAQ: STSI) has been bludgeoned by investors fleeing the stock over allegations of impropriety after investigations into stock transactions were begun. Yesterday, though, Star came out with a forceful denunciation of the trial attorneys piling into the fray, and reminding investors that lawyers trolling for clients aren't the same as lawsuits, let alone proof of any guilt. Moreover, while two shareholders have sued the company, their claims are meritless, and Star will defend itself vigorously.

It seems to me, as Hamlet's mother might say, Star Scientific "doth protest too much, methinks." The supplements maker has suddenly been very vocal about responding to these legal actions, but it was more than willing to remain mum on having been served with subpoenas by the U.S. Attorney's Office in Virginia until the very last possible moment. Despite having gotten papers in January and February of this year, it didn't issue one press release before the March filing deadline, waiting to the last possible moment to get their paperwork to the SEC.

As I noted at the time, accusations aren't convictions, and as Star is quick to point out these days that a lawyer seeking clients for a class action lawsuit doesn't amount to a lawsuit itself. I made that slip up myself the other day conflating the two, but even so, we should expect to Star's legal expenses to begin to rise.

This is really a shame because, by all accounts, the company's anti-inflammatory Anatabloc seems to work really well for people, and certainly has its adherents among investors. It's also noteworthy that the investigations being undertaken have nothing to do with its science, so, perhaps management would do well to abide by the old political maxim not to argue with those who can buy ink by the barrel.

Equipped for growth
Telecom equipment maker Alcatel-Lucent (NYSE: ALU) seems to forever be locked in turnaround mode. Ever since France's Alcatel merger with U.S.-based Lucent, the company has been casting about for a way to make itself relevant in a market dominated by better-financed rivals like Cisco. The decision by wireless carriers like Verizon and Sprint to cut back on their capital expenditures didn't help matters, while the financial woes of Europe weighed heavily on its operations.

Yesterday, though, analysts at Deustche Bank said that they think the equipment maker's new CEO has the smarts to actually achieve that turnaround goal. Saying Alcatel is as ambitious as always in mapping out its abilities -- though often coming up short -- the analysts believe CEO Michael Coombs has proven himself adept at realizing the cost-cutting initiatives that need to be implemented.

Other analysts in recent days have started reassessing Alcatel's chances, and they also like what they see. Evercore just pointed to its new software-defined network product as a serious challenge to Cisco, which is an advance that some Foolish analysts think could become "the tech trend for the next decade." SDN builds a programmable network that virtualizes the underlying hardware by adding a layer of software between the two. By doing so, a company can link its application to its network.

It is a niche that's just catching fire, but it seems everyone wants in, which could make it difficult for Alcatel to stand out. Oracle purchased Xsigo systems for its Ethernet fabric, VMWare bought up Nicira, and Cisco picked up Cariden as part of a trio of companies it scooped up last November. Juniper Networks also jumped in, purchasing Contrail two days after its IPO, and I've said that I think Brocade Communications has a better-than-average chance of making a mark in SDN technology.

As a shareholder, I'm happy that analysts think that Alcatel's ready to finally make good on its promise; but we've been down this road before, so I'll be watching and waiting for theory to catch up with reality.

Whoa, Nelly! 

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