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By David Sterman

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 beneficiaries of very generous buyout 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 economy sputters.

Company (Ticker) Recent Price September Gain 52-Week High 52-Week Low Catalyst
Keithley
(NYSE: KEI)
$21.45 +119% $21.52 $3.20 To be acquired by Danaher
Hyperco
(NYSE: HYC)
$6.27 +90% $6.51 $2.77 Spurned $5.25 a share offer from Verifone
Virnet
(NYSE: VHC)
$14.90 +90% $15.00 $1.85 Signing more patent licensees
ZymoGenetics (Nasdaq: ZGEN) $9.74 +89% $9.79 $3.70 To be acquired by
Bristol-Myers Squibb
Occam Networks
(Nasdaq: OCNW)
$7.87 +66% $7.90 $2.91 To be acquired by Calix
Nanosphere
(Nasdaq: NSPH)
$5.13 +65% $7.85 $2.91 Increased interest in nanotech stocks
Molycorp
(NYSE: MCP)
$28.38 +60% $30.00 $12.10 Rising interest in rare earth metals
Airtran
(NYSE: AAI)
$7.35 +58% $7.41 $4.05 To be acquired by Southwest
Motricity
(Nasdaq: MOTR)
$12.3 +57% $13.42 $6.55 Increased need of mobile device software

In particular industries, one deal sets off a fire drill, leaving other major players to follow suit. Delta (NYSE: DAL) acquired Northwest in October 2008, and word quickly spread that Continental and United (NYSE: UAL) may need to join forces to keep up with Delta's massive new industry-leading position. Sure enough, a deal soon came together and recently closed. The ink wasn't even dry on that closing when Southwest (NYSE: LUV) announced plans this week to acquire AirTran. And of course, that deal is already triggering rumors of further deals, pushing up shares of JetBlue (Nasdaq: JBLU) and Alaska Air (NYSE: ALK).

What gives? When an entire industry is growing at very low rates, companies start to focus on market share. 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 (NYSE: BMY) acquisition of ZymoGenetics 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 example, Nanosphere Inc. has risen more than +50% since I profiled the nanotechnology group in mid-September.

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.

Shares of Virnet Holdings continue their remarkable ascent. The stock had risen more than +200% this year before we profiled it in mid-August.

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 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 IPO. Motricity was an early pioneer in the field of mobile phone data services." 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.

Last, shares of rare-earth mineral play Molycorp 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.

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 acquired).

Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.
Source: September's 9 Biggest Gainers