Whoa! What Just Happened to My Stock?
Resist the urge to high-five everyone in the cubicles next to you. Your stock may have just strapped on a rocket pack and taken off for the moon, but 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)
|PMI Group (NYS: PMI)|
|BroadSoft (NAS: BSFT)|
|Transatlantic Holdings (NYS: TRH)|
The markets got crushed yesterday, falling 635 points, or 5.6%, as an incredible 94% of the 4,200 stocks listed on the New York Stock Exchange fell. So stocks that went higher, even marginally, are remarkable, let alone pretty big deals.
Higher and higher
The trio of mortgage insurers has been a volatile lot these days. Even as PMI Group was jumping yesterday in the face of all reason, MGIC Investment (NYS: MTG) was falling 13% and Radian Group (NYS: RDN) plunged 28%. But they're all rallying again today as the market apparently thinks there are just too many bargains out there to ignore, even amongst companies that seem doomed to die.
There was no accounting for PMI's bounce yesterday. Analysts were pointing to the insurer's main underwriting unit, MIC, as carrying risk-to-capital ratios that were more than twice the amount allowed and being ripe for being shut down. The unit is already banned from writing new policies in six states, and more are expected to join the list. PMI's stock movements of late are more akin to death rattles than to a recovery.
With 53% of the CAPS All-Star members rating PMI to outperform the broad market averages, there's a broad consensus that this is a troubled mortgage insurer whose future is very much in doubt. But insure your opinion is heard by heading to the PMI Group CAPS page and giving your view on whether it can survive if it can't write more policies.
Calling all bulls
The earnings results of BroadSoft prove that even in the face of the biggest market selloff since the financial industry's collapse, good results with a positive outlook can still trump the gloom and doom. Of course, the stock closed out last week by dropping 10% on fears of a communications-industry slowdown, so yesterday's bounce put it at just about where it had been on Thursday.
The VoIP service provider overcame the red tide by posting results that handily beat analyst expectations while increasing guidance for both the third quarter and full year. It should be noted that this is the second time this year that BroadSoft raised full-year guidance, having boosted it after first-quarter results also beat analyst forecasts.
When the year started, BroadSoft imagined that it would earn between $0.56 and $0.66 per share on revenues of $116 million to $120 million. After yesterday's beat-and-raise, it now expects non-GAAP earnings of $0.90 to $0.95 per share on revenues of $127 million to $130 million.
Compare those results with rival Sonus Networks (NAS: SONS) , which recorded a big slide in revenues for its second quarter. Not only did sales come in some $13 million below analyst expectations, but they were also 15% below last year's effort. It did, however, reaffirm its full-year revenue guidance, though it remained mum on profits.
Less than 10% of the CAPS All-Stars rating BroadSoft believed it could make such a dramatic turning, no doubt agreeing with the sentiment of stratisticalarb: "Weak sauce technology, absurd valuations, recent IPO. Super-competitive space will make maintaining even 15% ROE impossible."
What appears to be happening instead is that it's stealing share from its rivals. Add the Internet communications specialist to your watchlist, and then head over to the BroadSoft CAPS page and deliver your opinion on whether it can dial up further growth opportunities.
Ensuring a positive outcome
It took an attempt from Warren Buffett and Berkshire Hathaway (NYS: BRK.B) to buy Transatlantic Holdings to get a bump in its stock price and wade through the rising red tide.
The reinsurer already had an offer in pocket from Allied World Assurance for $3.2 billion, so Buffett's offer of $3.25 billion is not in and of itself a better offer. But Transatlantic expects Berkshire to come back with a richer proposal, one it's likely to go for.
The timing and the irony couldn't be better. Not only did Standard & Poor's downgrade the United States' debt, causing widespread panic (which led to a classic Buffett strategy of being greedy when others were fearful), but it also downgraded the outlook on Berkshire itself to "negative" from "stable" precisely because of the sovereign-debt risk its insurance and reinsurance business holds. The bid for Transatlantic might just have been Buffett's attempt to thumb his nose at S&P, since he presumably had to know a downgrade was possible.
Still, the CAPS community has been just as enthusiastic about Transatlantic's potential as Buffett appears to be, with 86% of those rating it bestowing a top five-star rating on it. Let us know in the comments section below or on the Transatlantic CAPS page whether you think someone will come in and try to trump Buffett.
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 The Motley Fool owns shares of Berkshire Hathaway. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway. 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.Fool contributor Rich Duprey has no financial position in any of the stocks mentioned in this article. You can see his holdings. The Motley Fool has a disclosure policy.
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