Are These Moves Higher Well-Deserved?
Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
On Friday, we saw an unusual amount of volatility in many stocks during a day of slight gains for the broader market. Typically, it doesn't take a lot for a stock to trade with gains between 5% and 20% in a session; it can be caused by an analyst's remarks or sometimes it's caused by earnings. Sometimes the moves are warranted and other times they are not. Therefore, I am looking at several moves higher to determine if the stocks are presenting value or a value trap.
Gaming Stock Rallies Due to Several Speculative Catalysts
On Friday, online social game company Zynga (NASDAQ: ZNGA) rallied 11%, making its five day return almost 30%. The stock traded higher for a number of reasons: 1) new in New Jersey about Governor Christie being onboard with online poker, 2) better than expected earnings, and 3) LinkedIn posted a blowout quarter than pushed several social media stocks higher. However, only one of these "catalysts" was connected to Zynga, its earnings.
LinkedIn has a completely different business model and Zynga is still several years from being able to profit from online gambling. Might I add, Zynga's earnings were not good, yet cost cutting made them appear decent. This is a tricky call; the stock is lower by 75% over the last year and Zynga trades with the most attractive price/sales ratio in the social media space. With that being said, much of its upside is connected to the prospects of online gambling, as problems with sustainability still exist. Therefore, I say the news was not worth the move and that it's a value trap until fundamental improvements occur as a result of these three "catalysts."
Biotech Stocks Rises After Data
When a biotechnology stock moves higher after good data I always ask myself one fundamental question, "what else is needed for an FDA approval?" I almost treat a Phase study like a checklist, and everytime one barrier is crossed I look to the next measure of efficiency. However, Oncolytics (NASDAQ: ONCY) allowed me to add a big mark on my checklist when they announced positive results from a mid-stage study examining the use of Reolysin in helping to shrink tumors.
The company said that 95% of patients with squamous cell carcinoma of the lung who used the product exhibited overall tumor shrinkage. Now, we turn out attention to larger studies and survival, if the drug maintains these results then we have an FDA approved product on our hands. So far, all looks good, but I will caution that with a $330 million market cap it’s expensive for a company with a lead product being a mid-stage product. Therefore, I might wait for a slight pullback.
A Fundamental Beat that Leads to Gains
Synchronoss Technologies (NASDAQ: SNCR) posted Q4 earnings that beat on both the top and bottom line with growth of 19% year-over-year and the stock rallied almost 20%! This is a small cap company that saw a strong beat in all measures including operating margins of 25%, in the software and programming industry. The company continues to grow with a strong balance sheet and solid cash flow. Furthermore, the stock is not overvalued, rather fairly valued compared to growth, meaning it could make a good longer term investment for those of you who believe in its long-term future.
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 has no position in any of the stocks mentioned. 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!