Whoa! What Just Happened to My Stock?

Before you go, we thought you'd like these...
Before you go close icon

The president's jobs speech failed to inspire economic confidence and the markets plunged, but resist the urge to high-five everyone in the cubicles next to you just because your stock strapped on a rocket pack instead. 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.

Stock

CAPS Rating
(out of 5)

Friday's Change

Ulta Salon (NAS: ULTA) **14.5%
China Green Agriculture (NYS: CGA) ***12.2%
Vantage Drilling (NYS: VTG) ***11.2%

With the Dow Jones Industrial Average (INDEX: ^DJI) falling 303 points Friday, or 2.7%, stocks that went appreciably higher are pretty big deals.

Charge it!
Cosmetics makers continue to post results that outperform other industries. Last month, Estee Lauder turned in a solid fourth-quarter report showing sales jumping 13% while profits surged 46% over the year-ago period. Makeup artist Ulta Salon did even better, reporting Friday that its revenues soared 23% and profits were up 73% year over year.

While part of Ulta's gains came from opening 21 new stores in the quarter -- giving it nearly 20% more square footage than it had last year -- same-store sales numbers (at stores that have been open for at least 14 months) were also surprisingly strong, with an 11.3% increase.

With the economy souring once more, the precision of the so-called "lipstick indicator" -- the rise in sales of affordable luxuries, like lipstick and makeup, during times of economic trouble -- is once more evident. (The term was coined by Estee Lauder former chairman Leonard Lauder.) The market's gyrations might just be a sign the indicator is pointing our way down again.

The reason for Ulta's better gains might be its one-stop shopping experience. Women can not only find cosmetics, fragrances, and hair-care products at one of its stores, but also enjoy a salon experience. That's why department stores like Macy's (NYS: M) , which feature Lauder's M.A.C. Cosmetics, and J.C. Penney, which offers salon services, are top rivals, but don't necessarily put it all together the way Ulta does.

Earlier this summer, CAPS member steveadl termed it a "category killer," which seems to be right on the money, and may be why 86% of the CAPS members rating Ulta think it will continue to outperform the market. Let us know in the comments section below or on the Ulta Salon CAPS page if you think this indicates additional higher returns in the future.

Fertilizer or manure?
Shares in fertilizer maker China Green Agriculture were buoyed by strong quarterly results, with sales nearly quadrupling on the back of an acquisition last year. Revenues went from $16.2 million last year to $60.3 million this year, with $40.3 million added as a result of the acquisition. So even without that influx of sales, revenues were still up 23% year over year.

I still see a cause for concern here, though. While sales rose 272%, the cost of those sales rose 453%! How long will the company be able to produce those sales when they obviously cost far more to make? No wonder gross margins were sliced to 35% from 53% a year ago.

Moreover, CGA has apparently achieved major growth with its new Gufeng acquisition. Considering it had $54 million in revenues through all of 2009, the $40 million it contributed this quarter is astounding. In fact, Gufeng added over $107 million to CGA this year, a near-doubling of revenues! That far surpassed the $88 million it expected Gufeng to contribute this year. Not bad for a company it bought for $8.8 million and which had been running at just 60% capacity. Expansion earlier this year no doubt helped wring new efficiencies into the state-of-the-art plant.

And CGA is still integrating its humic acid production into Gufeng's processes. If successful -- and at this rate, how can it not be? -- it will more effectively be able to compete against Yongye International (NAS: YONG) , which sells both humic acid- and fulvic acid-based fertilizers.

Let's just say I've got my doubts about CGA, though the folks at Motley Fool Global Gains have recommended it. I've rated it on CAPS to underperform the market, but I'm in the minority there; 94% of the more than 1,050 members who have weighed in see it beating the Street. Add the fertilizer maker to your watchlist then dig deeper on the China Green Agriculture CAPS page.

A betting man
There was no specific news to account for offshore contract drilling services provider Vantage Drilling running higher Friday, but it has often been eyed as a possible takeover target. After Ensco (NYS: ESV) bought Pride International and Seahawk Drilling (a Pride spinoff) declared bankruptcy, smaller drillers like Vantage have been eyed as potential acquisition candidates.

Being heavily indebted, Vantage may want to find a suitor to take over its burden. Certainly with insiders making small but steady purchases over the summer -- and as recently as a few weeks ago -- management seems to believe in the company's potential, whether as a target or a stand-alone company.

CAPS members and All-Stars have similar outlooks for Vantage's future, with 94% believing it can surpass the broad market indexes. You can add Vantage Drilling to your watchlist and have all the Foolish news and analysis aggregated for you in a single place.

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. The Motley Fool owns shares of Ensco, Yongye International, and China Green Agriculture. Motley Fool newsletter services have recommended buying shares of China Green Agriculture and Yongye International. 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.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story

Want more news like this?

Sign up for Finance Report by AOL and get everything from business news to personal finance tips delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.

From Our Partners