Will These 2 Stocks See a Second Move Higher?

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

It's easy for a stock to see a multi-month rally after years of poor performance -- but long and consistent gains indicate true change on behalf of the company -- so let's look at two stocks that have seen short-term gains to determine if a longer trend higher is possible. 

The makings of a second move higher

Although it may be difficult to remember, think back to January of this year: First Solar (NASDAQ: FSLR) was coming off a six-month 200% gain and was trading at $33 a share. But over the following four months, the stock lost 25% of its value, and many were saying that its rally was long gone.

Now, fast-forward and First Solar has returned gains of 45% in 2013 behind upside guidance, bullish upgrades, and favorable policies from Washington. The point is that after a six month rally of 200%, people began to get scared. But now, those same people hardly remember the first four months of 2013; due to First Solar’s strong performance.

Two recent pullbacks

For any high-flying stock, a pullback is healthy, as it gives you a better entry point and it gives investors the opportunity to process all the information that had led to such large gains. Back in December 2012, I chose both Alcatel-Lucent (NYSE: ALU) and Rite Aid (NYSE: RAD) as my value of the year for 2013; and both have been high flyers.

In 2013, Alcatel-Lucent has produced gains of 35% (26% in the last month) and Rite Aid has produced gains of 110%. However, after strong runs higher, both stocks have hit a bit of resistance, and have seen their large trends higher come to a halt.

What creates the second pop higher?

The second leg of First Solar’s rally was caused by fundamental gains, which is exactly what both Rite Aid and Alcatel-Lucent will need to trade higher.

For Rite Aid, all of its gains have been related to fundamentals, as the company has posted three consecutive quarters of profitability after six years of net loss.

Alcatel-Lucent’s rally has been speculative, as all gains have been created due to a proposed restructuring program. Yet, the company has not seen any fundamental improvements during its rally from under $1.00.

Which will see a move higher?

With Rite Aid, there are still a lot of reasons to be optimistic. A couple days ago I wrote an article looking at the current state of the pharmacy space, showing “why” the best days are yet to come. This is a space that has a whole slew of new high-margin generics coming to market in the next 16 months, and Rite Aid in particular has the most to gain with the cheapest valuation relative to fundamentals.

In my opinion, any and every pullback in shares of Rite Aid should be acquired rapidly. This is a company that is not moving on speculation. It is a stock that was trading at $1.00 back when clear fundamental improvements were taking place; as investors had no trust after years of disappointment. Thus, with its recovery still in its infancy, I think Rite Aid could trade like First Solar, with another leg to its rally.

Alcatel-Lucent has some of the greatest potential in the market – and I have loudly expressed my satisfaction with the company’s restructuring program – but the company has since backed out of its plan, which could have led to a thinner and leaner yet more efficient Alcatel-Lucent.

In a recent article, I detailed its “new plan” and how nearly everyone who supported the “original plan” has since left the company. The company had taken $2 billion from Goldman Sachs to restructure its business, but is now only planning to cut costs and complete the sale of its submarine optical unit.

This near $20 billion per year company could have sold its Optics, Managed Services, and its Fixed Line business and could have achieved significant profitability. Instead, the company “chooses” to stay large with operating margins of just 0.37%. With these things considered, I’m not sure how there can be a second leg to its rally.

Final thoughts

Alcatel-Lucent has doubled from its 52-week lows, which is when the restructuring plan was first announced. Thus, all of its gains are related to the original plan of drastic asset divestments. As a result, with these changes not occurring, I believe it is only a matter of time before Alcatel begins a decline in valuation; although I’d love to see the company succeed.

I think Rite Aid will see a First Solar like pop, and after a period of consolidation, rally even higher. In “this article” I detail the level of value that is present in shares of Rite Aid, and I believe that investors are simply taking a breather, as part of a healthy pullback, prior to new highs being created. With that said, I’d watch the stock closely.

Brian Nichols is long RAD. 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!

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