How to Handle the Market's Rocket Stocks
One of the best problems to have as an investor is needing to figure out what to do after your investments have appreciated by a significant amount. Should you hold your shares in hopes that the party is just getting started, sell them off while you still can, or find some middle ground?
In the end, the stock market is a forward-looking mechanism. So while it's nice to see significant appreciation in share prices, it's what the next three to five years look like that should matter most when considering what to do in such cases.
Below, I've highlighted four companies that have had significant share price appreciation since March 1 of this year. I'll let you know why these companies are up, what I'd do if I owned shares, and why. Read all the way to the end and I'll offer you access to a special free report on three stocks that should help ensure your retirement.
What It Does
Change since March 1
|Arena Pharmaceuticals (NAS: ARNA)||Weight-loss drug maker||NM||72%|
|Dangdang (NYS: DANG)||Chinese e-tailer||NM||45%|
|Pacific Capital (NAS: PCBC)||Financial services company||21||63%|
|Tudou Holdings (NAS: TUDO)||Online video sharing service||NM||92%|
Source: Yahoo! Finance, Google Finance. NM = not meaningful due to negative earnings.
Beware the buyout investments
Of these four, two certainly aren't worth buying now, and you may want to consider selling your shares if you already own them. That's because both of these companies -- Tudou and Pacific Capital -- have buyout offers on the table that account for their significant gains over the past month.
Pacific Capital was presenting too tempting a case for UnionBanCal to pass up. UBC, a subsidiary of Mitsubishi UFJ Financial, offered a tender for shares of Pacific Capital for $46 apiece. With shares currently sitting at $45.61, there's a very limited upside to this equation.
Tudou and rival Youku (NYS: YOKU) , on the other hand, were battling each other for dominance in the Chinese streaming space -- a task made much easier by the absence of behemoth YouTube in the country. Last month, Youku bought out Tudou to cement its place on the Internet. The combined companies will have over one-third of the streaming market share, putting it far ahead of third-place player Sohu.com.
For every share they hold, Tudou shareholders will get about 1.6 shares of Youku. That means that you've got to have a lot of faith in Youku to hold your Tudou shares, and I simply don't have that faith. The business model is fundamentally broken, with costs outpacing revenue gains; and I'm not alone in feeling this way. Because of this, I'll be opening a bearish CAPScall for Youku and Tudou on my All-Star CAPS profile.
Speaking of China...
While we're on the topic of the world's fastest-growing economy, let's talk about Dangdang, one of China's leading e-tailers. On one hand, our own Jeremy Phillips talks about why the company's proximity to the point of sale makes it an enticing play. On the other, it's facing some serious in-house competition from the likes of Taobao and 360buy.com.
Both the announcement of a strategic partnership for the selling of electronic goods and news that a Chinese manufacturing index was showing strength have helped bolster the company's stock. When it comes to Dangdang, I'm on the fence. A small investment now wouldn't hurt, but at the same time I'm staying away from Chinese small caps. For the time being, I'll just watch this one from the sidelines.
How do I look?
Next on the list of companies to cover is Arena Pharmaceuticals. The company's filing for weight-loss drug lorcaserin was accepted by the European Medicines Agency, and the stock's had a big run because of it.
But as our in-house pharma expert Brian Orelli has pointed out, just because EU approval might be easier to come by than approval from the FDA, it might not justify such a jump in price. As it is, the pharmaceutical industry is far from an area of expertise for me, and I'd surely sell my shares after the recent jump in price unless I had a very solid thesis for holding.
If you're really focusing on retirement...
As I said at the beginning, if you're holding these shares now, you've got a good problem on your hand. I'd almost certainly sell my shares of Arena, Pacific Capital, and Tudou. Dangdang, on the other hand, is a much tougher call. I'm sitting it out, but I see lots of reasons to keep on holding.
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At the time this article was published Fool contributor Brian Stoffel does not own shares in any of the companies mentioned. You can follow him on Twitter, where he goes by TMFStoffel.Motley Fool newsletter services have recommended buying shares of Sohu.com. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.