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Stock Strategist

Are These Stocks Tricks or Treats?

Three tricks and three treats for Halloween.

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Stock investors have had plenty of treats during the last 12 months. From Halloween 2009, the Dow is up more than 15%, and there have been some other pleasant surprises along the way. Corporate earnings have been surprisingly strong as management teams find ways to keep profitability high, end demand in the United States has seen some signs of life, and emerging markets appear to be solidly back on track.

But there were plenty of tricks to be had, as well. The sovereign debt crisis in particular gave investors around the world quite a fright. And even though the menace seemed to have been contained with a massive European Union/International Monetary Fund bailout like a zombie from a bad horror film, fiscal worries keep popping up around the world. Closer to home, unemployment remains frightfully high, and the prospect of another round of quantitative easing is making many nervous.

No one knows for sure what tricks and treats the next year will bring, but investors can stack the deck in their favor by looking for sweet deals and staying away from scary valuations.

Treat
 Advanced Micro Devices (AMD)
AMD shares have risen 57% in the last 12 months, and analyst Andy Ng sees even more upside for investors. AMD has been a beneficiary of the rebound in the semiconductor industry since the cyclical downturn of 2009. And the firm's new Bulldozer architecture should power 2011 as AMD grabs some server-chip market share from arch rival  Intel (INTC).

Trick
 Estee-Lauder (EL)
Current Estee-Lauder investors got a treat after the firm reported surprisingly strong third-quarter earnings this week, sending the stock up 10%. But analyst Erin Swanson warns that investors are overestimating how long the firm can sustain improvement. Being tied primarily to traditional department stores will be a drag as consumers look to buy cosmetics at other outlets. Furthermore, the depressed level of marketing spending can't continue forever, and when that spending picks back up, margins will fall once again. The firm is making strides to meet these challenges and will remain a formidable player, but the market is a bit too giddy on the shares at the moment.

Treat
 Wells Fargo (WFC)
There were few things more terrifying then the recent financial crisis. But Wells Fargo managed to come out of the malaise better than most. Analyst Jaime Peters says that management steered the bank away from risky bets during the upturn as the bank focused on the conservative practice of taking deposits and making loans to credit-worthy borrowers. Between the Wachovia purchase and the fact that many other banks are still on the ropes, Wells now has the opportunity to expand its market share and produce some very tasty cash flows.

Trick
 Netflix (NFLX)
By all means rent a scary movie from Netflix but use a lot more caution before jumping into the stock. Netflix built its business by mailing out its ubiquitous red envelopes to movie watchers across the country. The firm has been able to exploit big economies of scale in this business and there is likely growth ahead for a few years. But analyst Larry Witt believes that these advantages will be short-lived. As video delivery moves online, competition will become increasingly fierce. The cable and Internet providers, not to mention  Apple (AAPL) and  Amazon (AMZN), are all clamoring for a piece of the pie. Netflix will likely still be a big player but the days of huge growth are behind it.

Treat
 VCA Antech (WOOF)
Investors who like to take their furry friends out with them on Halloween may already be familiar with this stock. VCA Antech is the largest operator of animal hospitals and veterinary labs. With 40% operating margins, analyst Debbie Wang sees the labs as the crown jewel of the company. Pet-care spending is taking a hit as consumers keep spending in check, but in the long term there will likely be plenty of pet owners willing to pay up for quality care.

Trick
 Rite Aid (RAD)
Rite Aid is a great place to pick up some candy or a giant spider web. But it probably won't make a great investment. Morningstar's Matt Coffina thinks the firm lacks a realistic plan to turn its business around. The firm's largest problem is a massive debt load. Coffina expects Rite Aid to turn a small operating profit in the coming years but doubts it can generate enough cash flow to cover its interest expense.

Jeremy Glaser does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.