Whoa! What Just Happened to My Stock?


Hoping against hope that Greece will get its financial act together and that Italy won't descend into chaos, the markets staged a rally yesterday. 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)

KV Pharmaceutical (NYS: KV.A)



Dynegy (NYS: DYN)






With the markets rising 101 points yesterday, or almost 1%, stocks that went appreciably higher are pretty big deals.

Shining a light on growth
Maybe KV Pharmaceutical's treatment to reduce risk for pregnant women with a history of singleton spontaneous preterm birth was worth 10 times more than the competition was charging, after all.

By now you know that the pharmaceutical developed and got approved for use its drug Makena, and then ignited a firestorm of outrage by pricing it at around $1,500 a dose when doctors had been prescribing off-the-shelf combinations of the drugs for just $10 to $20 a pop. Even after offering patient assistance programs and cutting the price by more than half, KV did nothing to help its tarnished reputation and sales stalled. The stock, which soared to almost $14 a share on Makena's approval, crumbled in the aftermath and hasn't recovered since. Yesterday's near-doubling in value still only brings it back above the $1 level.

Hologic (NAS: HOLX) , which developed the drug for KV, took its money and ran. Once the drug got FDA approval, it turned over the rights to Makena and washed its hands of the matter.

The catalyst for yesterday's move was the FDA's agreeing to investigate KV's claim that the potency and purity of the rival formulations have not been met. In one test KV ran, one of the active ingredients was found to be glucose rather than hydroxyprogesterone caproate.

I think it will amount to naught. The FDA is nothing if not a political animal, and it allowed pharmacies to continue concocting their lookalikes even after Makena's approval because of the hullaballoo that followed KV's pricing decision. Will it now have the courage to say the pharmacies to which it gave permission passed out inferior drugs and formulations that don't live up to its own standards? Seems hard to believe.

The pharmaceutical has held up well in investor opinion, with 93% of those rating KV on CAPS thinking it will still outperform the market. Add KV Pharmaceutical to your watchlist to see how it performs now that the FDA is on the case.

Taking flight
You usually don't see investors getting so excited about their company filing for bankruptcy protection, but energy producer Dynegy filed a plan for protection that actually seeks to protect equity investors while allowing bondholders to take the losses. It's an unusual development since bondholders are usually the first in line to be paid off; stockholders typically get nothing.

It's also atypical because Dynegy is seeking bankruptcy protection for just one of its units, Dynegy Holdings, which it transferred rich assets out of earlier this year. Bondholders, including Public Service Enterprise Group (NYS: PEG) , are suing Dynegy, saying the transfers made the unit worthless and apparently guaranteed this outcome. With the coal and natural gas assets out of bondholders' reach, equity investors will be protected by the continuing operations. However, it would certainly seem an argument could be made that Dynegy engineered this set of circumstances solely to escape from expensive leases that the bondholders hold on its power plants, which the courts might not like, if true.

Yet even protected Dynegy shareholders probably rue the days the $5-a-share buyout offer from Blackstone Group (NYS: BX) was rejected and they snubbedIcahn Enterprises' (NYS: IEP) sweetened $5.50 offer. Even after yesterday's surge, the stock is still below $4 a share and if the courts don't agree with Dynegy's conveyance of the assets, it could easily find its way back to the cellar once again.

Although CAPS member matias100 likes that Dynegy trades for less than the cash it has in the bank, there still seems some outsized risk in an investment here. Tell us on the Dynegy CAPS page or in the comments section below if you think the bankruptcy filing will stand, then add the stock to your watchlist to see how it plays out.

Demand a response
Demand-response aggregators like EnerNOC and Comverge assist consumers and businesses in reducing their electrical consumption during peak demand periods by remotely throttling back on the juice coming into their homes and businesses. In return, utilities and grid operators pay them for reducing the overall demand on the grid. During the July heat wave that fried the East Coast, EnerNOC alone curtailed more than 1,200 megawatts of power out of the approximately 6,650 megawatts it has under management.

But it has also been engaged in a running dispute with electric-grid operator PJM over alleged double payments EnerNOC received. While the Federal Energy Regulatory Commission sided with PJM's proposal to change its market rules, a decision that could dramatically affect EnerNOC's operations, it also said the grid operator had to do so in such a way as to minimize the impact at least through 2015. Since PJM accounts for more than half of EnerNOC's total revenues, it seems to matter little what minimization methods are used. It's going to hurt.

Maybe yesterday's stock move was a delayed reaction to the third-quarter earnings EnerNOC reported Monday morning, since the stock actually dropped 3% that day. It has been expanding internationally in an effort to diversify away from PJM, but analysts don't see much of a catalyst to move the stock significantly higher.

CAPS member TMPhool recognizes the customer concentration risks, but thinks demand for demand-response aggregation will help EnerNOC gain momentum:

Long term winner. Main risks stem from a concentration of customers. As the need for this service grows, so will their customer base. Good value at this price

Add EnerNOC to the Fool's free portfolio tracker if you'd like to see if it can up the volume for additional opportunities.

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 EnerNOC.Motley Fool newsletter serviceshave recommended buying shares of EnerNOC.Motley Fool newsletter serviceshave recommended writing puts in EnerNOC. 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.

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