Hope for greater financial stability in Europe again drove U.S. markets higher, 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 a few stocks that just hit the afterburners, and see whether they're truly headed into orbit.
Human Genome Sciences (NAS: HGSI)
Flagstar Bancorp (NYS: FBC)
Toll Brothers (NYS: TOL)
Source: Yahoo! Fiance, Motley Fool CAPS.
With the Dow Jones Industrial Average (INDEX: ^DJI) rising 180 points yesterday, or 1.6%, stocks that rose even more are pretty big deals.
A 50-year breakthrough
A few weeks ago, we got a sense of how big the market could be for lupus treatment Benlysta when Human Genome Sciences reported August sales of $6.5 million, up from $4.9 million in July. Analysts apparently weren't the only ones surprised by the strength of the sales, as rumors are flying that marketing partner GlaxoSmithKline (NYS: GSK) now wants to buy it out for $25 a share.
It's not the first time there's been speculation that Glaxo wants to acquire its partner, but now it has an incentive to do so, as it can see for itself what the potential is for the drug. As the first new treatment for lupus in 50 years, Benlysta is likely to see a huge ramp up in demand.
Of course, not everyone is on board with Benlysta. The U.K.'s government-run health-care system won't allow patients access to the treatment because regulators don't see the benefits outweighing the costs. But with the rest of the world pretty much on board, investors are backing HGS, and 80% of the CAPS members rating it believe it will go on to outperform the broad indexes.
Add the biotech to your watchlist and let us know on the Human Genome Sciences CAPS page if you think the rumors will prove true this time.
A run on the bank
Without any news to underlie the rise in its share price, investors in troubled Flagstar Bancorp should be worried that it will simply give back those gains -- and more -- in the coming days. The regional bank has been selling off bank branches to other banks, first selling 27 branches to PNC Financial (NYS: PNC) and then 22 to First Financial Bancorp.
The $240 million in deposits it gave PNC certainly hasn't hurt that bank, which just reported earnings that beat analyst expectations as credit provisions and charge-offs decreased (though profits fell from the year-ago period).
But by continuing to focus on its major markets, Flagstar hopes to make good on its turnaround, though nonperforming loans continue to hamper the effort. Last quarter, allowances for loan losses accounted for a smaller percentage of loans held for investment but were actually a larger dollar amount than last year, forcing the bank to sell off some of the loans. It's due to report earnings next week and analysts are looking for an improving situation (though not yet a profitable one).
While Wall Street analysts are bullish, CAPS All-Stars remain sanguine; with just 57% of those registering an opinion thinking the regional banker can beat the broad market averages. Tell us in the comments section below or on the Flagstar Bancorp CAPS page if you'd deposit your real-life money in this bank as an investment, and add the stock to your watchlist to see if it successfully negotiates the u-turn.
Don't buy the hype. Homebuilder stocks are still not worth getting into even though Toll Brothers, KB Home (NYS: KBH) , and Pulte Group (NYS: PHM) all surged yesterday as sentiment turned up. And despite that being followed by reports of housing starts jumping 15% in September to reach a 17-month high, these are one-time items that can't surmount the very high hurdle housing still needs to get over.
The National Association of Home Builders said its homebuilder sentiment index rose well ahead of last month's reading of 14 and the anticipated 15, hitting 18. Of course, anything below 50 means a very pessimistic outlook so as "jubilant" as they are, homebuilders are a pretty dour bunch these days.
Further, housing starts got a boost from the effects of Hurricane Irene and demand for multifamily housing. It just goes to show how depressed the housing market is that even with a large inventory of discounted homes on the market, people would prefer living in an apartment. Don't look for homebuilders to recover anytime soon.
CAPS All-Star kurtdabear correctly points out that even the best builders, like Toll, won't see their foundations firm for years:
Buying ANY home-builder for the next several years -- even the "best," e.g., TOL or LEN -- will be akin to purchasing shares of the world's premier buggy-whip manufacturer in the early 20th Century. There is no upside, and there will be no profit for many,many years -- or ever, if they go bankrupt waiting for a sales recovery.
It used to be the king of the McMansion, but Toll Brothers lately has been living out of a cardboard box. Add the builder to the Fool's free portfolio tracker to see if it can hammer home a case for growth.
At the time thisarticle was published Fool contributorRich Dupreyholds no position in any company mentioned.Click hereto see his holdings and a short bio. The Motley Fool owns shares of PNC Financial Services Group.Motley Fool newsletter serviceshave recommended buying shares of GlaxoSmithKline. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.