Whoa! My Stock Just Crushed the Market!
The markets roared back to life yet again, 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)
|MELA Sciences (NAS: MELA)|
|Avalon Rare Metals (ASE: AVL)|
|Ceradyne (NAS: CRDN)|
With the Dow Jones Industrial Average (INDEX: ^DJI) soaring 272 points yesterday, or 2.5%, stocks that went appreciably higher are pretty big deals.
Finally, MELA Sciences is almost at the brink of being able to market its unique MelaFind cancer-detection device. It received an approvable letter from the FDA that puts it one step closer to a commercial launch, and long-suffering MELA investors sent the stock soaring.
The MelaFind is a radical departure from the methods employed by industry giants like General Electric or Siemens (NYS: SI) . Rather than using a person to pore over the images from PET/CT scanners and make the determination whether a biopsy is needed, the MelaFind emits light waves to capture images of suspected lesions and uses a sophisticated algorithm trained on MELA's database to analyze the images.
As exciting as the development sounds, CAPS member fencejake offers up some sobering thoughts on what it really means. Since the FDA larded so many conditions on its approval and limited the scope of its use, MELA's ability to generate real sales from the device is severely constricted.
While bulls rejoice on today's pyhrric victory, it is the bears who will enjoy the last laugh, as Mela Sciences will never generate meaningful sales or reach profitability. The stock has sold off early morning highs given that the company has already tempered sales expectations. CEO said on the conference call that it expected 200 US box placements by the end off 2012. At a price of $5,000 per placement (based on previous price guidance provided by CEO) this implies just $1m US sales in 2012 -- which compares to 2012 and 2013 Bloomberg consensus sales estimates $10m and $39m.
I think this is a substantive issue for MELA, and I've marked it on CAPS to underperform following the big run up. Let us know in the comments section below or on the MELA Sciences CAPS page if you think labeling can be expanded, and then add the stock to your watchlist.
A light in the darkness
Disaster was partially averted when a plane carrying executives of Avalon Rare Metals crashed on a return trip from the company's Thor Lake exploration project. While the plane's two pilots died, the three executives and four "visitors" survived with non-life-threatening injuries.
Although unidentified, it's likely the nature of the "visitors" is what sparked the rally in Avalon's shares. Message boards are abuzz with speculation they were investors possibly looking to buy out the rare earth elements play and were visiting the region to see what their money would be buying.
This might be the best opportunity Avalon has if true. In comparison, shares of other REE plays like Molycorp (NYS: MCP) and China Shen Zhou Mining (ASE: SHZ) were off because of the downward pressure on REE prices. Rare earth elements aren't quite so rare as their name implies, and companies that rely on their use are quickly searching for alternative elements to replace them after China threatened to create a bottleneck in their supply.
I've also marked Avalon to underperform the markets on CAPS because, despite the bursting of the balloon earlier this year, the sector is still rife with speculation. The rumors of a buyout are just the latest example. Add Avalon to your watchlist, and then dig deeper on the Avalon Rare Metals CAPS page to see what others think.
A betting man
Despite all the talk of winding down our hydra-headed war efforts, our global military presence has increased over the past year, with soldiers in Iraq, Afghanistan, Libya, Somalia, and elsewhere.
That means personnel need protection, and Ceradyne became one of the beneficiaries as the Defense Logistics Agency, which supplies the four branches of the military with materiel, placed an indefinite delivery/indefinite quantity order for its ceramic breast-plate inserts. They were willing to place a $127 million order up front, too.
The Fool's Rich Smith notes Ceradyne is cheap on a number of metrics and has plenty of cash on hand, making it a likely candidate to fulfill the growth prospects analysts have assigned it. That could be why 97% of the CAPS members weighing in on Ceradyne believe it will outperform the broad market indexes. Add it to the Fool's free portfolio tracker or let us know on the Ceradyne CAPS page whether you think it will be able to live up to expectations.
Going into orbit
That's why 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. 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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