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, Headwaters (NYSE:HW) shares rose 25% in a single day when it reported net earnings that declined by 70% -- much better than expected.

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. Let's use the collective wisdom of more than 115,000 CAPS members 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 30% 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:

Source: Motley Fool CAPS. Price return from July 11 through Aug. 8.

With our list of screened stocks pulled up in CAPS, just a single click on each company can give us some context behind its recent momentum.

Feeling sick
Health-care services provider UnitedHealth Group hasn't been the healthiest of companies lately: Its stock was in decline the first half of the year. The company isn't bowing to intense competition by lowering premiums, so it's factoring in a large loss of members to lower-priced competitors this year. It's also laying off 4,000 workers and hopes to put an options backdating lawsuit behind it by settling for $895 million.

The painful measures haven't driven away all investors, with some continuing to see value in shares even as they declined. Second-quarter earnings reported late in July gave investors hope: Although UnitedHealth reported a year-over-year earnings decrease of 25%, investors were pleased that the numbers were better than guidance given earlier. The addition of 2 million new members also helped push revenue up 7% from last year and has given the market reason to push shares back up roughly 40% in the past month.

More than 96% of the 2,583 CAPS members who have rated the company see it outperforming the market. They also have a strong ally in their corner -- Warren Buffett sees promise in the company and continues to add UnitedHealth shares to his Berkshire Hathaway holdings.

Patient baker
Also reversing a slide in its stock this year, oven maker Middleby recently announced a second-quarter profit increase of 36% at $0.99 per share. Earnings were helped by acquisitions and higher sales, as revenue jumped 53% to $173.5 million on strong international sales and higher demand for the company's commercial food service products.

The company maintains a rational approach to acquisitions, as seen in its willingness to stand firm on its $1.5 billion offer to acquire kitchen equipment maker Enodis back in 2006. Enodis wanted more money, Middleby chose to stand down, and eventually Manitowoc (NYSE:MTW) took Enodis for $1.9 billion earlier this year. With Enodis' growth slowing in 2007, it was probably a wise move on Middleby's part.

This patient approach by a skilled management team, coupled with stable margins and a good return on invested capital, has already made Middleby a top growth stock. And while Middleby's commercial oven business isn't the most exciting thing, long-term investors have been rewarded with more than a 480% return since Tom Gardner first recommended the company to Motley Fool Hidden Gems subscribers in 2003. Nearly 97% of the 2,770 CAPS members rating Middleby see the gains continuing and have voted for it to outperform 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 opinions can make your due diligence a whole lot easier.

Add your take on these or any of the 5,500 stocks covered in Motley Fool CAPS. It's totally free, and the payback is more than worth it.