The markets roared back to life, but resist the urge to high-five everyone in the cubicles next to you just because your stock also strapped on a rocket pack. 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 a few stocks that just hit the afterburners, and see whether they're truly headed into orbit.
Conn's (NAS: CONN)
MGIC Investment (NYS: MTG)
Walter Energy (NYS: WLT)
With the Dow Jones Industrial Average (INDEX: ^DJI) soaring 275 points yesterday, or 2.5%, stocks that went appreciably higher are pretty big deals.
Race to the bottom?
Electronics and consumer goods retailer Conn's was snapped up as it repositioned itself for profitability in the future, but it looks to me as though it's pursuing a course that is doomed for failure.
It wasn't all that long ago when rival hhgregg was concocting turnaround plans, like flooding a market with stores to juice sales, only to see them tail off when the excitement wore off. Best Buy (NYS: BBY) , too, has taken the "throw it at the wall" approach to see what sticks in a bid to find something -- anything -- that will capture the mojo it once had. Stand-alone mobile phone stores were a recent effort; a new one is to allow third-party sellers to sell products on its online store, like Amazon.com. Becoming "Amazon-lite" is a disaster waiting to happen.
So are Conn's plans. It's pushing its rent-to-own business and in-store financing to capture more customers. It admits trying to get more applicants via Internet appeals will attract lower-quality credit customers, making the strategy risky, but over the past three years approximately 60% of its sales have been financed. By also focusing more on furniture and mattresses, which carry higher margins, it's looking to carve into markets already dominated by Rent-a-Center and Aaron's.
Yet 91% of the CAPS All-Stars rating Conn's think it can beat the market averages over the long haul, though its low two-star rating suggests they also believe there are better places for your money. Tell us in the comments section below or on the Conn's CAPS page if you think this is a strategy that will work.
Feeding off the dying housing market
Think of it as a bigger slice of a smaller pie. With PMI Group (NYS: PMI) and Old Republic International prohibited from writing new mortgage insurance business, whatever business there is can be divvied up between the remaining rivals, MGIC Investment, Radian Group (NYS: RDN) , and even American International Group.
The impact is already being felt at MGIC, which released its monthly operating statistics for August showing new business written advanced to $1.3 billion, up from $1.2 billion in July, while delinquent inventory fell 1% to 183,000 loans.
The problem that I see still for mortgage insurers is the number of delinquencies that are resolved through "cures," or when a loan returns to on-time payment status. Radian recently said 21% of the cures it reported were as a result of loan modifications, but S&P has found 80% of the loans modified between 2007 and 2010 defaulted within two years of the modification. MGIC itself assumes half of them will default.
As of the end of June, it had more than 14,000 loans for which the government's loan modification program trial period had begun, and more than 31,000 loans that cured after going through the program and haven't yet redefaulted. Along with the current state of the housing market, no doubt that's part of the reason 52% of the All-Stars rating MGIC think it will underperform the broad indexes.
Add MGIC to your watchlist, then insure your opinion is heard on the MGIC Investment CAPS page.
A betting man
The old Buffett maxim of being greedy when others are fearful seems to be at work in the coal markets as a number of merger deals are coming into play after the late summer sell-off in the industry.
Peabody Energy and ArcelorMittal teamed up to buy Macarthur Coal, and rumors are swirling that Walter Energy is the target of Anglo American. While no specifics have been announced, just the talk of another buyout in the industry was enough to send other players higher. The entire CAPS coal sector was up more than 5% yesterday.
The rumor mill was churning out a possible $120-per-share offer for Walter, which, with the stock closing at $91 a share yesterday, means there's still more than 30% of upside available if the tale proves true.
For CAPS member Jeffrey2012, maybe a buyout would be the best option for Walter, since he sees the company as having weakening fundamentals, particularly after its disappointing second-quarter earnings report: "This company is a perfect barometer of the country being the conglomerate that it is. Weakening fundamentals combined with weak outlook makes this company a bad buy."
Mine the depths of the Walter Energy CAPS page for additional opinions on its prospects.
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 thisarticle was published Fool contributor Rich Duprey owns shares of Best Buy, but he holds no other position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of American International Group and Best Buy. Motley Fool newsletter services have recommended buying shares of Amazon.com, Walter Energy, and hhgregg, and formerly recommended Best Buy. 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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