Whoa! These 3 Stocks Are Shining Bright


It might not have been the biggest rally, but the Dow Jones Industrial Average jumped enough yesterday to push the index to a new multiyear high. The Dow rose 54 points to hit 14,035, its best close since 2007. That puts it well within striking distance of its all-time high of 14,151, a short 128-point rally away.

While the three companies below joined in the fun, all recording double-digit gains, resist the urge to high-five everyone in the cubicles next to you. Smart investors won't celebrate until they know why their stock surged, because without a fundamental basis for the bounce, these stocks could just as quickly make the return trip down.


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At the office
Considering the state of the economy, the idea that three large office-supply companies could effectively compete against one another proved itself a more ludicrous idea daily. Rather than any one company prospering, all three were ailing. Staples , as the largest of the bunch, would have been precluded from buying either of its rivals for antitrust reasons -- it tried that once and was shot down -- but the idea of its smaller rivals joining forces always held an allure, and that came to fruition yesterday as Office Depot offered to buy OfficeMax for $1.2 billion, or around $13.50 a share.

The deal recognizes the problems facing big-box retailers as Amazon.com and other Internet rivals have invaded their turf. Indeed, Staples is the second-largest online presence in terms of SKUs behind Amazon. Analysts anticipate the merger will lead to a significant number of store closings, which would help not only the combined company, but Staples as well, which explains why its shares also rose 13% on the news.

While the agreement makes sense for the retailers, it still has to pass regulatory muster. The crippled industry might have staved off a good part of its demise had Staples been able to buy Office Depot in the late 1990s, but the FTC spiked the deal over fear of higher prices. An OfficeMax-Office Depot merger could lead to a similar outcome despite its obvious benefits.

Let the sun shine in
Both Power-One and SunPower were among the biggest gainers in the solar industry, which saw quite a few names in the space power higher. The problem is that there was no real news to account for the rise in their shares other than analysts turning more bullish on the sector. Power-One was the beneficiary of an upgrade to a "strong buy" from Raymond James yesterday, which said the inverter maker was "arguably the highest-quality public company in the space."

As The Motley Fool's Travis Hoium points out, Citigroup, Cantor, and Bank of America/Merrill Lynch have also given the green light to investors to pile into solar stocks, and apparently they chose yesterday as the day to do so.

I'm not so confident. The industry is still beset by an inventory glut, falling polysilicon prices (though analysts say they've bottomed), and a slowdown in project sales. While Power-One reported quarterly results two weeks ago showing a 23% increase in shipments of inverters, they were still less than it had originally anticipated because of materially worse demand in Europe. Earlier, SunPower issued equally gloomy results.

Even the Raymond James analyst admits the inverter market is a tough place to be right now, and he calls the cell and module space "hypercommoditized." Those are hardly ringing endorsements even if he sees Power-One's clean balance sheet as an overarching strength.

As I pointed out recently regarding Solar City, the hope is that residential installations through leasing programs will drive business forward. GTM Research forecasts residential solar financing will grow nearly fivefold by 2016, pushed higher in part by the growth of bonds backed by cash flows generated from leasing the panels. While Solar City is the biggest name in the game, SunPower also ranks among the largest third-party ownership vendors.

The solar shops may be having their day in the sun, but the economics of the business still don't favor them and I can't see the gains holding.

Whoa, Nelly!
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The article Whoa! These 3 Stocks Are Shining Bright originally appeared on Fool.com.

Fool contributor Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com, Power-One, and Staples. 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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Originally published