It’s easy for a stock to see a multi-month rally after years of poor performance — but long and consistent gains indicate true change on behalf of the company — so let’s look at two stocks that have seen short-term gains to determine if a longer trend higher is possible.
The makings of a second move higher
Although it may be difficult to remember, think back to January of this year: First Solar, Inc. (NASDAQ:FSLR) was coming off a six-month 200% gain and was trading at $33 a share. But over the following four months, the stock lost 25% of its value, and many were saying that its rally was long gone.
Now, fast-forward and First Solar, Inc. (NASDAQ:FSLR) has returned gains of 45% in 2013 behind upside guidance, bullish upgrades, and favorable policies from Washington. The point is that after a six month rally of 200%, people began to get scared. But now, those same people hardly remember the first four months of 2013; due to First Solar, Inc. (NASDAQ:FSLR)’s strong performance.
Two recent pullbacks
For any high-flying stock, a pullback is healthy, as it gives you a better entry point and it gives investors the opportunity to process all the information that had led to such large gains. Back in December 2012, I chose both Alcatel Lucent SA (NYSE:ALU) and Rite Aid Corporation (NYSE:RAD) as my value of the year for 2013; and both have been high flyers.
In 2013, Alcatel Lucent SA (NYSE:ALU) has produced gains of 35% (26% in the last month) and Rite Aid Corporation (NYSE:RAD)has produced gains of 110%. However, after strong runs higher, both stocks have hit a bit of resistance, and have seen their large trends higher come to a halt.
What creates the second pop higher?
The second leg of First Solar, Inc. (NASDAQ:FSLR)’s rally was caused by fundamental gains, which is exactly what both Rite Aid Corporation (NYSE:RAD) and Alcatel Lucent SA (NYSE:ALU) will need to trade higher.
For Rite Aid, all of its gains have been related to fundamentals, as the company has posted three consecutive quarters of profitability after six years of net loss.
Alcatel Lucent SA (NYSE:ALU)’s rally has been speculative, as all gains have been created due to a proposed restructuring program. Yet, the company has not seen any fundamental improvements during its rally from under $1.00.
Which will see a move higher?
With Rite Aid Corporation (NYSE:RAD), there are still a lot of reasons to be optimistic. A couple days ago I wrote an article looking at the current state of the pharmacy space, showing “why” the best days are yet to come. This is a space that has a whole slew of new high-margin generics coming to market in the next 16 months, and Rite Aid in particular has the most to gain with the cheapest valuation relative to fundamentals.