Are Any of These Moves on Friday Higher Warranted?

Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Unless a stock is trading at a significant level of resistance, or following a large move either lower or higher, it doesn’t take a lot for a period of excessive volatility to create gains. A stock can see a 5%-20% gain for a number of reasons ranging from earnings to analyst notes. Sometimes the moves are warranted and other times they are not. Therefore, I am looking at several moves higher to determine if any are warranted, and are now worth buying.

Looks Like Consumers and Investors are Back to Playing Games!

Worldwide publisher of online and game console entertainment products Activision Blizzard (NASDAQ: ATVI) saw an 11% pop on Friday after posting a blowout quarter. The company not only beat both top and bottom line expectations but also issued a very bullish forecast for the upcoming quarter. Furthermore, the company crushed estimates in every single measurable area of its business, from having operating margins of 44% to solid video game sales for all of its big releases.

As a result, the stock is sitting at multi-year highs, yet from a valuation standpoint, it’s still cheap. The stock trades with a price/sales of 3.0 and at just 12 times next year’s earnings. Therefore, considering the fact that ATVI has traded virtually flat for four years, I think it’s due for a breakout and could go higher.

Casino Stock Breaks Out in a Big Way

Ever since Caesars Entertainment’s (NASDAQ: CZR) IPO the stock has traded in a steady downtrend. However, during the last three sessions the stock has rallied more than 65% for a number of reasons. First, there was news of the company offloading assets into a partnership to lower its debt. The company plans to issue $1.5 billion in debt at 9% interest, which may sound like a lot, but it will actually lower the rates on its existing debt. Then, there was news that New Jersey Gov. Chris Christie asked for a revision to online gambling, which marks a major change of heart.

To put this news in perspective, investors believe that combined it means a better balance sheet and more revenue. However, it still doesn’t clear the fundamental issues, which are a horrible balance sheet, unprofitability, and five years of declining revenue. There are many who believe the stock is cheap; however with its fundamental issues I see no reason to chase this rally, unless any of these catalysts will create profitability.

FleetCor Rises with Big Earnings Beat

Business payment solutions company Fleetcor Technologies (NYSE: FLT) rose almost 11% on Friday after the company announced its quarterly results. The company topped expectations by a significant margin, posting revenue growth of 47% yoy. The company posted EPS growth of 59% yoy and issued bullish full-year expectations. As a result, investors were optimistic.

My only problem is that this is an expensive company with operating margins of 44%. The company continues to improve on its margins but sooner or later there will come a point where costs can no longer be cut and margins will peak. Therefore, at this price based on current fundamentals I think it’s too expensive, although I wouldn’t be surprised to see it rise even more.

Conclusion

A stock’s performance during a typical day does not necessarily mean that a stock will break out over a period of time. Too often we associate stock performance with fundamental performance, yet it’s the inconsistencies between these two factors that create value. The ability to identify these inconsistencies is a psychological behavior-changing skill that very few investors are able to perfect. In the past, I have talked about this subject in great detail, and have taught investors how to change these tendencies to return large gains. My advice is to become a smart investor, by learning how to logically assess what caused a stock to move compared to its valuation. Then, if there is a distinction in value you are able to capitalize on the value.  


BrianNichols has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard. The Motley Fool owns shares of Activision Blizzard. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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