A rally is something that is easily identifiable. A stock can rally at any point: It can trade higher after a long-period of trading with loss, it can bounce higher after trading flat, or it can simply continue to rally over a course of many years showing no signs of slowing down. In this article I am looking at three such examples, and trying to determine if and when any of these rallies will end.
Google: A Flat Stock No More
Google (GOOG) should not necessarily be a surprise as a tech stock that has rallied, but after five years of trading flat there are a lot of people who are optimistic regarding the company's future. Google had broken free of its range in the three months that followed July with a 30% gain. However, after a very disappointing quarter, the stock then fell 15% in six weeks, but has since rallied 11%, and looks to be going higher.
If you consider the fact that Google has traded flat for the last five years, then with rising fundamentals, it's perhaps more attractive than ever before. After its bad quarterly miss, the company has been pushed higher due to a number of catalysts, including: The S&P raising its debt rating, speculation over a potential TiVo acquisition, a very successful launch of the Chromebook, and finally the near end to the FTC investigation.
If I had to find a problem with the tech giant it would be concerns over mobile ad spending or, most importantly, margins. The company has seen margin declines over the last two years, but has also chosen to invest in new ventures. The company grew its revenue by 45% during its last quarter and is expected to see 30% earnings growth over the next year. Therefore, with a forward P/E of just 15.56, expected growth, and many catalysts for the future, I think Google is not only a good buy during this rally, but also a great long-term investment.
Nokia: Bouncing from the Bottom
After a five-year loss of nearly 95%, communication equipment company Nokia (NOK) has rallied almost 150% during the last five months. This gain and the newfound level of optimism is a result of success from the company's new Lumia 920 and a belief that sales will continue to be strong. So far, the phone has sold out in many stores around the world, and a large deal with massive telecom company, China Telecom (CHA), is yet more reason to be optimistic (because the company does not sell the iPhone). Consequently, the stock is now getting this much needed boost as it appears that Nokia has found a competitive smartphone device.
While investors are buying shares of Nokia and rejoicing at all of its positives, there are dull sides to the story as well. We know the phone has sold out in several countries, but what we don't know is what the initial supply was. There have been several reports that suggest Nokia had limited supplies of the product manufactured, thus making the sellouts appear positive. Furthermore, there are many who believe that all positives are now priced into the stock, and that any disappointment could lead to a downward trending stock.
Nokia continues to be a highly controversial company, both with high value and risk. The company's fundamentals have eroded over the last two years, yet its stock has eroded even faster. With some improvements, it is possible that the stock could continue to trade higher. But, if sales are not up to par, then this stock could fall fast. With that in mind, I'd sit on the sideline and wait for more confirmation before jumping into a Nokia investment.
3D Systems: Just Keeps Going Higher!
3D Systems (DDD) is one of those stocks that, every time you think it has reached a top, it pulls back-and then rallies even higher. So far in 2012 there has been no point of resistance too strong and no valuation that investors believe is too expensive for this speculative stock.
3D Systems has traded with a gain of nearly 250% in 2012, as investors believe that 3D printing will become the next big fad in America, and throughout the globe. 3D Systems has had success in the industrial space, but has now begun to enter the consumer world. However, with the company's valuation, and its interest, it looks as though investors have already priced in its success.
3D Systems is trading with a market cap of almost $3 billion, with revenue of just $320 million. Its metrics compare to that of a high-profile social media company, not a company that makes an actual product. It's currently trading with a P/E ratio of 76, and expectations are for the company's earnings to double in 2013. So as you can see, investors are anticipating success and have not accounted for the potential of competition from companies such as Hewlett-Packard (HPQ). With its current valuation, and it being such a speculative play, I can't find a reason to buy. However, I wouldn't be surprised to see it go higher (it always does).
Whether you are long, short, or undecided regarding one of these three stocks, no one can deny the recent performance. It is difficult to determine the short-term trends of these three stocks, because with the exception of Google, both Nokia's and 3D Systems' rally has been in part due to speculation. Regardless, these are all stocks that fall under the category of having rallies despite three different trends, and we can assume that at least one will continue. We just don't know which one.