5 Rally Stocks: 2 To Buy, 2 To Sell, And 1 To Watch

by: Henry Kawabe

Thursday was by most accounts a very balanced trading day that maintained a level of gains, but did not provide anything particularly special. The gains, however, were surprising after weak economic data and a mixed bag with earnings. There were a few "special" stocks that traded considerably higher, by more than 20%, with great news. I am looking at five stocks that traded significantly higher, the news that drove the stocks higher, and how to play what happens next.

Five Below (NASDAQ:FIVE) was the big news of the day, after pricing its IPO at the high end of its range ($17), the stock rallied and held gains throughout the day to close at $26.50 with a 55.88% gain. Five Below has a good chance to perform well in the market. Previous IPOs of retailers suggest that it will trade slightly lower in the next few days, but retailers have done well following IPOs—just look at Michael Kors Holdings (NYSE:KORS). Five Below is a very fast-growing specialty retailer. In the last 12 months, the company has posted revenue of $321.5 million and income of $13.9 million, compared with revenue of just $125.1 million in fiscal 2009. The company also has plans to expand to over 2,000 stores in the next few years, a major upgrade for the company that currently has 192 stores. Therefore, with explosive growth and rapid expansion, I expect Five Below to trade significantly higher over the next year. However, I'd wait for the small pullback that should occur in the next few days.

Mellanox Technologies, Ltd.'s (NASDAQ:MLNX) gains were a close second to FIVE with its 41.46% return after posting incredibly strong earnings and blowout guidance. Big jumps are nothing new for this momentum stock, as it appears that we are seeing the second coming of previous momentum stocks Netflix, Inc. (NASDAQ:NFLX) or Green Mountain Coffee Roasters, Inc. (NASDAQ:GMCR), except in the semiconductor and cloud space. The company posted an EPS of $0.99, a 267% gain year-over-year, and a $0.25 beat over expectations. It also posted a 111% year-over-year gain in revenue of $135.5 million, which beat expectations by $7.2 million. The bear's argument for selling this stock is that it's expensive. However, it trades with a forward ratio of just 33.90, which is cheap considering its growth. In fact, if the company continues to beat expectations, it may be trading with a forward ratio of 20, representing very significant upside. As an investor, I am playing this stock similar to Five Below, once it pulls back just a little I plan to buy, because this is a long-term play in a very fast growing company where the sky is the limit.

pSivida Corp. (NASDAQ:PSDV) traded higher by 28% on Thursday after U.S. health regulators cleared its experimental eye insert to skip initial studies and proceed to late-stage trials. At one point, the stock was trading with a gain over 50%, as investors were optimistic with the shortcut for the medical device company, it also may have signaled to investors that regulators felt confident in the device's ability. If proven effective, the device would treat the third largest cause of blindness in the U.S. Investors must ask themselves what is the size of the potential market? The company has a market cap of $57 million, and for the most part it has been a rough year for the stock. The rally may have been a result of the stock being oversold, rather than a company-changing event. As a result I will sell the news and not buy regardless of the stock's immediate direction.

My favorite rally of the day was Select Comfort Corporation (NASDAQ:SCSS) and its 26.78% gain after strong earnings. The stock had fallen over 25% in June after Tempur-Pedic International, Inc. (NYSE:TPX) lowered its guidance by a ridiculous margin. Select Comfort lowered with Tempur-Pedic, as investors typically sell industries rather than stocks. Although Select Comfort proved that Tempur-Pedic is in trouble and heavily exposed to Europe, it is not. The company's direct-sales approach has led to higher mattress sales and better margins. Though I love this stock and believe it's a great company, I am watching it rather than buying it. The reason I wouldn't buy the stock is because of Tempur-Pedic and the weakness in the industry. Tempur-Pedic has set the bar low; however, if other companies announce weak results, or if Tempur-Pedic misses its low guidance, then it could be devastating for Select Comfort, despite the fact that Select Comfort just gave its own encouraging guidance. I think Select Comfort is fairly priced, and if it drops lower to a price around $24, I would be in the mood to buy.

OCZ Technology Group Inc (NASDAQ:OCZ) soared 23.03% on Thursday showing that a little rumor is all it takes to blast an oversold stock. The beaten down stock was recharged after Fudzilla.com reported that Seagate (and others including Micron) is looking into the possibility of acquiring OCZ Technology. To me, it seems reasonable. However, I think it ends badly for investors of this stock. First off, the wording of the Fudzilla "report" leaves tons of room for error. The words "looking" and "possibility" don't sound too encouraging, nor does it sound like a report of confidence, but one of speculation and opinion. Because after all, I could be "looking" into the "possibility" of buying real estate in France, but chances are I will not. In my opinion, there are many investors who could get hurt by this report because chances are Seagate will issue a press release, or a reporter will contact the company to enquire about the rumor and Seagate is going to deny it. OCZ Technologies is way too fragile to handle any negative publicity. I'd sell the rumor and avoid the stock, because unless Seagate announces an acquisition in the next couple of days, this will most likely be ugly for those who bought as the stock was trading higher.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in FIVE, MLNX over the next 72 hours.