Of the 2,000 stocks that comprise the
Russell 2000 Index
, 10 of them rose by at least +50% in September. And half of those
are the beneficiary of very generous
offers (while a sixth name rebuffed an offer). That M&A trend
has been in place throughout the summer and shows no signs of
slowing down. That's because large companies have ample cash to
spend and need to find ways to keep sales rising while the
||To be acquired by Danaher
||Spurned $5.25 a share
offer from Verifone
||Signing more patent
||To be acquired by
||To be acquired by Calix
||Increased interest in
||Rising interest in rare earth metals
||To be acquired by
||Increased need of mobile device
In particular industries, one deal sets off a fire drill,
leaving other major players to follow suit.
acquired Northwest in October 2008, and word quickly spread that
may need to join forces to keep up with
's massive new industry-leading position. Sure enough, a deal soon
came together and recently closed. The ink wasn't even dry on that
announced plans this week to acquire
. And of course, that deal is already triggering rumors of further
deals, pushing up shares of
JetBlue (Nasdaq: JBLU)
Alaska Air (
What gives? When an entire industry is growing at very low rates,
companies start to focus on
. And once one player builds share, others fear that
newly-strengthened competitors will steal yet more share so they
have to parry back.
Biotech sees lots of deal-making for an entirely different reason.
Small firms pursue often-promising new drugs but lack the resources
to effectively market them once they are approved. Big drug firms
have all kinds of marketing muscle, but they often lack products in
development to deepen their presence in hot biotech areas.
Bristol-Myers Squibb's (
ZymoGenetics (Nasdaq: ZYMO)
is one of a long line in this sector, and you can expect to see
dozens more just like it during the next few years.
Outside of M&A
Yet not all of the strong gainers are tied to deals. As the market
rallied in September, investors moved out on the risk curve and
bought stocks in more speculative and risky industries. For
Nanosphere Inc. (Nasdaq: NSPH)
has risen more than +50% since I profiled the nanotechnology group
in mid-September. [Read:
This Once-Hot Sector Could Heat up Again
Yet it's important to remember that speculative stocks generally
only do well when markets are rising. So it's not clear that
September's gains can be extended unless the company delivers any
promising news for its technology under development.
Virnet Holdings (NYSE :VHC)
continue their remarkable ascent. The stock had risen more than
+200% this year before we profiled it in mid-August. [
3 Stocks that Could See a Windfall of Cash from
Since then, it's tacked on another +130% as the company moves onto
more investors' radars. Further gains from here will solely be a
function of new licensing agreements with major tech firms. As I
noted in that column, "VirNextX is gearing up to secure other
licensing agreements for its technology. (In August), the company
filed fresh lawsuits against
Apple (Nasdaq: AAPL)
Cisco Systems (Nasdaq: CSCO
), Japan's NEC, and others." Who knows how that will play out, but
it looks as if this stock has even more room to run.
Motricity (Nasdaq: MOTR)
is a clear example of why it pays to watch recently-issued IPOs.
Sometimes they can drift lower as they fail to gain traction among
money managers. As I noted back in August, "At first glance, this
should have been a hot
. Motricity was an early pioneer in the field of mobile phone data
7 Beaten-Down IPOs that Could Stage a Comeback
] That's because the company was stuck in a temporary revenue
slowdown. But at a recent industry conference, the company laid out
its slate of upcoming technologies for mobile phone developers and
was a clear hit.
Since that conference on September 21st, shares surged from $9 to
$13 in just a few trading sessions. When I see moves like that, I
wait for a pullback, because some of the recent buyers really don't
know the story here and simply chase a stock's momentum. When they
exit, you can usually get the stock at a cheaper price.
Lastly, shares of rare-earth mineral play
rose a solid +60% in September, thanks to a dispute that took place
halfway round the world. China now controls output for almost all
rare earth metals that have a range of industrial applications. The
Chinese government is increasingly showing a willingness to block
exports of rare earth minerals from any trading partner that annoys
it. Japan is the latest victim.
This has led Molycorp to sharply expand output at a rare earth mine
in Southern California. The company is sitting on more than two
billion pounds of raw ore, which likely translates into around 200
million pounds of rare earth minerals. This makes the mine
potentially the largest rare earth play outside of China. But this
is surely a speculative stock -- sales are still minimal and
investors are betting that the company's mining output will rise
sharply and the market price for rare earth minerals will continue
to rise. It's unclear how to determine an appropriate price for the
stock at this time. Momentum investors are calling the shots right
now, and you may be better off waiting for a pullback.
Action to Take -->
It's hard to spot further upside in any in these names in the
near-term. It pays to monitor these stocks and wait for a pullback,
as they might be quite vulnerable to profit-taking if the market
slumps anew (except for the companies that are set to be
-- David Sterman
David Sterman started his career in equity research at Smith
Barney, culminating in a position as Senior Analyst covering
European banks. David has also served as Director of Research at
Individual Investor and a Managing Editor at TheStreet.com. Read
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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