Is This Stock's Rise Driven by Fundamentals or Sheer Frenzy?

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

The US stock indices fell for the second day in succession, in the absence of any major news affecting the markets. Irrespective of the market conditions and macro-economic news, some stocks always tend to either outperform or underperform the broader markets. These stocks are driven completely by stock-specific news, in some cases due to company disclosures and in others due entirely to the rumor mills running overtime. And again further classifying the company disclosures is the factor whether the markets have over-reacted to the news or appropriately accounted for the new information. In most cases, the markets tend to go in to frenzy mode and the stock prices shoot up more than it should, and in successive sessions, it has been observed correcting itself to more reasonable levels.

One can simply check out the ‘Most actively traded’ section or the ‘Top Gainers’ section to find out these stocks. And to determine what has actually caused the steep rise or rapid fall in the stock prices, one just need to look at the impact the news has on the bottom line of the company. Big companies like Apple (NASDAQ: AAPL) often rise or fall on news. So, Apple's iPhone launches, management changes, issues and pros and cons of their products - everything makes an impact on the company. Just recently, the company saw a steep plunge in its stock with the rumors of a slashing of orders for its iPhone 5 screens. Although the news came out in respected publications like the Wall Street Journal, many Apple enthusiasts are of the opinion that this plunge was the effect of a mere rumor - which, if true, goes to show how pervasive is the effect of news on a stock even as big as Apple.

This is true not only of huge companies, but also for small companies like Vringo (NASDAQ: VRNG) whose stocks can go up or down based on market news. Only recently, while Vringo fought a lawsuit against Google (NASDAQ: GOOG) over infringement of its Lang/Kosak Relevancy Filtering Technology patent, we saw the stock go up and down based on daily news of the proceedings of the case. I was a close follower of the lawsuit, and our company wrote quite a lot on this; so I had the opportunity to follow the price movements of Vringo closely. If you see the following chart from October to November last year, you can see how the various rumors about the lawsuit saw the price soaring and falling back, until it steadied with the end of the trial.

<img src="/media/images/user_14377/1_11_large.png" />

Taking the case of Perion Network (NASDAQ: PERI), the stock scaled new highs at last check as the company released its guidance for 2013. The stock rose to $12.38 from its previous close of $9.45, before settling down at $11.35 at the end of the trading session, thereby generating returns as high as 30% intraday and 20.1% at the end of the day. Taking forward the topic, it can be seen that the market initially laid too much emphasis on the news of the guidance and the frenzy drove up the stock price to new highs, before settling at more reasonable levels.

The company is currently trading at trailing price to earnings ratio of 12.4 which is moderately priced. Using the forward looking P/E based on the guidance, it drops to 7.04, making the stock an attractive buy for a technology company, even after the 20% rise in its stock price the previous day, and this warrants a deeper analysis into the company.

Perion Network is a Tel Aviv based digital media company focusing on simplifying and enhancing the e-mail experience. Their prime product IncrediMail is now being used in 80 countries in 8 different languages. It is a unified application used to manage multiple email accounts and Facebook messages in one place. Their other products, Smilebox is a photo sharing service and SweetIM is an instant messaging and Facebook application. Perion products have seen more than 300 million downloads with more than 50 million average monthly visitors. Perion’s applications are monetized using a freemium model.

Their revenues in the Q4 of 2012 are expected to be $21 million, more than double the Q4 2011 revenues, thus bringing the total non-GAAP revenues for 2012 to $61 million, an increase of 64%, from $37 million in 2011.

On the guidance front, Revenue is expected to be $110 million, representing overall growth of 80% over 2012. Non-GAAP net income is expected to be at least $20 million, representing a net profit margin of 18%. Non-GAAP EPS is expected to be $1.61, and the forward P/E calculates to 7.04. Restating my earlier point, this makes it a very good buy considering it is a high-growth technology company. The company is also coming up with its iPhone app which is sure to add further value to the company.

We can safely conclude that the steep rise in this particular case is one that was driven completely by the fundamentals, though it looked like a frenzy driven rise at first look. As further evidence, the stock is still holding on to its previous day’s gains.


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