Whoa! My Stock Just Crushed the Market!
Nov 14th 2011 4:57PM
Updated Nov 14th 2011 4:58PM
The markets cobbled together another strong rally after Italy's vote for austerity, but just because your stock strapped on a rocket pack and went even higher, resist the urge to high-five everyone in the cubicles next to you. Smart investors won't celebrate until they know that upward leap was justified. Without a fundamental basis for the bounce, these stocks can quickly make the return trip down.
Is now the time to lock in profits, or is this just the first step toward even higher valuations down the road? Let's examine several stocks that just hit the afterburners and see whether they're truly headed into orbit.
CAPS Rating (out of 5)
|Mitek Systems (NAS: MITK)||**||16.9%|
|ServiceSource (NAS: SREV)||*||13.4%|
|Rite Aid (NYS: RAD)||**||10.8%|
With the markets rising 260 points on Friday, or 2.2%, stocks that went appreciably higher are pretty big deals.
Shining a light on growth
Maybe it was in anticipation of Mitek Systems' earnings report today, but there was no company-specific news that drove the stock higher. Investors might be expecting the company that helps banking customers deposit their checks through their smartphones to have good things to say today, expanding banking relationships beyond It has bank-deposit relationships with JPMorgan Chase (NYS: JPM) , Capital One Financial, and US Bancorp.
It might have the opportunity to reignite an industry that is maturing, six years after coming into existence. While using a smartphone to make deposits is a relatively new phenomenon, remote deposit capture (RDC) has been fairly widespread since the passage of Check 21 in 2004. The usage of scanning devices to make deposits has been broadly accepted by large commercial interests, but according to the market researchers at Celent, it's hitting a plateau, with growth of just 10% this year.
That could be because it's a commercial-oriented technology; Mitek's smartphone app brings RDC down to small businesses and consumers, where it could spark an uptake and proliferation. Yet whatever gee-whiz factor Mitek generate, highly rated CAPS All-Star BuffettJunior1 says investors need to still look at the financial statements.
The company's stock based compensation alone is almost higher than its revenue. This is a huge red flag! Also, the recent run up in the stock price is very dangerous. This is because once the stock options start getting exercised it will cause massive dilution. Once this stock crashes, which it surely will, it will crash hard. That I can guarantee!
Add Mitek to your watchlist, and let us know on the Mitek Systems CAPS page whether you agree that insiders will be diluting the opportunity of outside shareholders.
A source of inspiration
CRM software specialist ServiceSource has been public since only March, but it's raised its full-year revenue guidance three times already, and the latest forward-looking glance more than offset the widening losses it reported for its third quarter.
Getting customers to renew their service contracts with tech companies represents an opportunity for them to generate high-margin revenues. While Oracle or salesforce.com (NYS: CRM) craft CRM and ERP solutions from traditional business intelligence tools, the real competition is from solutions designed in-house. ServiceSource is seeing more industry leaders switching to its proprietary offerings and that's driving its outlook higher. Dell, Siemens, and General Electric's health-care division signed on with ServiceSource in the third quarter.
Although Wall Street is unanimous in its belief the CRM specialist will beat the market averages, the CAPS community is more circumspect, with only 38% of the All-Stars agreeing with that assessment. Tell us on the ServiceSource CAPS page or in the comments section below whether you think this is a growing trend, and then go and add it to your watchlist to see how it plays out.
Under the weather
Drugstore chain Rite Aid also had no special news to move its stock, but it does have a high short interest ratio (though not egregiously so), and that can cause a squeeze to occur as covering positions feeds on itself. But an analyst also suggests that Rite Aid may be the beneficiary of the falling out between Walgreen (NYS: WAG) and Express Scripts, which can't agree over terms for a pharmacy benefits management contract.
While CVS Caremark (NYS: CVS) would also probably gain customers if the two can't come to an agreement by the end of the year, Rite Aid, because it's so depressed, would see greater results from the flight from Walgreen, a fact CAPS member vaderblue highlights in marking the drugstore chain to outperform.
RiteAid will pick up millions in sales from Walgreens. This stock will do well now that Walgreens lost express scripts. I am long on RAD.
Add Rite Aid to the Fool's free portfolio tracker to see whether it has the prescription for growth.
Going into orbit
It pays to start your own research on these stocks on Motley Fool CAPS, where you can read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made, all from the stock's CAPS page. Then you can decide for yourself whether your stock's headed for re-entry or off to infinity and beyond.
At the time this article was published Fool contributor Rich Duprey holds no position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of JPMorgan Chase and Oracle. Motley Fool newsletter services have recommended buying shares of salesforce.com and Dell and shorting salesforce.com. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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