Whoa! What Just Happened to My Stock?
Dec 12th 2011 1:02PM
Updated Dec 12th 2011 2:38PM
The markets rallied after Europe's leaders agreed to work on the structural problems that caused their sovereign debt crisis. But just because your stock strapped on a rocket pack and went 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)
|Diamond Foods (NAS: DMND)||**||52.8%|
|Blue Coat Systems (NAS: BCSI)||***||43.7%|
|SIGA Technologies (NAS: SIGA)||***||32.1%|
Source: Yahoo! Finance, Motley Fool CAPS.
With the Dow rebounding 189 points on Friday, or 1.6%, stocks that went appreciably higher are pretty big deals.
Is it snack time again?
Is the research note from a KeyBanc Capital Markets analyst that caused Diamond Foods' stock to soar just wishful thinking, or does it provide insight and guidance into the snack maker's internal investigation of payments to walnut growers? It probably depends on whether you're long or short the stock and whether you're hoping the deal for Procter & Gamble's (NYS: PG) Pringles business will go through.
While I don't have a dog in this race, I have to admit to being skeptical. Diamond is investigating whether a $50 million "momentum" payment to walnut growers in September of the current fiscal year was actually for walnuts purchased last year. Had that payment been included in Diamond's financial statements then, operating profits would have been halved. The KeyBanc analyst says he's seen documents showing Diamond made a similar payment last year and is convinced the probe will end shortly with no finding of wrongdoing.
What's worrisome to me is that if this was so straightforward, why was an internal investigation needed to deduce that? There's also news of an audit committee director's suicide that has clouded the controversy, though Diamond says the two events are unrelated.
If the KeyBanc analyst is right and the Pringles deal can move forward as planned, Diamond Foods becomes a major player on par with PepsiCo's (NYS: PEP) Frito Lay and Kraft's coming snack food spinoff. If not, P&G goes back to market perhaps and looks for someone else to take over the chips business.
The Fool's Anders Bylund -- TMFZahrim on CAPS -- noted the incredibly high percentage of Diamond Foods' float sold short, so the positive report likely contributed to a squeeze occurring on the stock helping to send it higher. Add Diamond Foods to your watchlist to see whether the shorts get squeezed further or the analyst's report was just whistling past the graveyard.
Put on your coats
After a recent study by Juniper Networks (NAS: JNPR) found that 90% of businesses suffered security breaches over the past year, and more than half of them experienced at least two such incidents, it's not surprising that industry players like Check Point Software and Riverbed Technologies (NAS: RVBD) have been using the climate of fear to post better numbers.
Troubled Blue Coat Systems was able to capitalize on the situation as well, though its revenue was down year over year. Its reported sales grew sequentially, pointing to a healthier environment and better opportunities ahead. Apparently, private equity firm Thoma Bravo thinks so, too, particularly with the security specialist's stock selling at a discount. It offered to buy Blue Coat for $25.81, a 48% premium to the previous day's closing price.
Let us know in the comments section below whether there are other similarly priced security stocks that could see M&A activity. Riverbed is down 40% from its 52-week high. Will Blue Coat Systems get bought? Put its stock into the Fool's free portfolio tracker to see whether anyone makes an offer.
Winning by default
SIGA Technologies has said that despite its controlling shareholder's political connections, it never asked any elected or political official to get involved in the process that ended in it landing a lucrative government contract. Yet SIGA has been under a cloud of suspicion after the Health and Human Services Department awarded it a $433 million smallpox antiviral contract, despite doubts the treatment will work or that it's even needed. A member of SIGA's board noted the competitor for the contract was not eligible under the rules, so SIGA was actually just the last company standing. Nothing to see here -- move along.
That's convenient, but according to reports from the Los Angeles Times, the government apparently replaced its contract negotiator who objected to the biotech's "outrageous" profits at taxpayer expense after SIGA complained. A new official took over the negotiations, which eventually concluded successfully for SIGA.
PharmAthene is certainly not complaining about how this is progressing. It recently won a court verdict affirming its right to a portion of those "outrageous" profits, so the sooner SIGA gets this scandal behind it, the sooner PharmAthene will reap the rewards. Its stock was up almost 16% as well.
Three-quarters of the CAPS All-Stars rating SIGA believe it will outperform the broad indexes, but the congressional investigations are gathering steam and I see shares tumbling anew. I've rated the biotech to come up short against the market, but tell me in the comments section below or on the SIGA Technologies CAPS page if you think this means the company is out of the woods. Then put it on your watchlist to keep track of its progress.
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 reentry, or off to infinity and beyond.
At the time this article was published Fool contributor Rich Duprey holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of PepsiCo. Motley Fool newsletter services have recommended buying shares of Riverbed Technology, Check Point Software Technologies, PepsiCo, and Procter & Gamble; writing covered calls on Riverbed Technology; and creating a diagonal call position in PepsiCo. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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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