Stephen Frankola sends: As I begin this, Vonage (VG) is trading at over $2.40 in the aftermarket.

Vonage was trading below $.40 just five days ago.

The (investment) world is looking for an explanation. Barron’s tech writers have been blogging frequently over the past few days, marveling at the huge move. The Yahoo! message boards are abuzz.

To me, this looks like a euphorically-driven chain reaction.

A short squeeze might have triggered this rally, but it isn’t responsible for the majority of today’s move. According to Yahoo! Finance, around the end of July, there were 4 million shares sold short. 41 million VG shares traded today, so short covering can’t be credited with this move.

There also hasn’t been any significant news within the past few days. Vonage reported optimistic results in the recent past, and they also announced a new international phone service last week. Vonage’s comment on the situation seems to imply that the entire world just realized these couple tidbits and all tried to enter at once. I’m not buying that. I think that’s the equivalent of saying “we have no idea why our stock is up 500% in a week, but we’re just as estatic about it as you are!”

So my conclusion is that this is a euphoric rally driven by people going long. Owners at $.40 (who may have been underwater from previous purchases) probably aren’t selling into strength, driving price even higher. Coverage in the media likely attracts new investors to this hot stock.

VG has been prone to such explosive moves; I was lucky enough to own it in the past prior to a positive announcement; shares jumped 100%.

Buying (or shorting) VG today or tomorrow is simply gambling. Without a clear driver of this extreme movement, there’s no concrete reason why shares are worth so much more today than they were last week. At the same time, shorting against such powerful upward movement is insane. Three times during the day today, VG moved up over $.20 (representing 20+% moves) in mere minutes. That’s not the kind of momentum I’d want to be shorting into.

This is certainly an interesting story, and it’ll be interesting to see how and where things settle down. Stay tuned.

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Stephen Frankola sends: Zachstocks published a piece on Chipotle Mexican Grill (CMG) right after they released earnings, expressing caution towards the company’s performance going forward, and its already-rich value.

Zachstocks was concerned that Chipotle’s results were helped by playing games with its store openings and advertising spending.

company significantly cut back on marketing and promotional spending which had a temporary effect of reducing expenses.

While the end result was impressive, the means to get TO this earnings level appears unsustainable. Obviously if you significantly cut marketing and promotional spending, over a short period of time you will begin to see sales dwindle. For that reason, management noted that 2009 marketing spending will mirror 2008 as a percentage of revenue. And since the second quarter was so light in this area, you can bet that the promotional spending will be very high in the third and fourth quarter. This will drive margins lower.

At the same time, management is guiding for 120 to 130 new store [openings] in 2009. With only 50 completed in the first half, that means investors can expect at least a 40% increase in new store openings in the second half. These new stores typically have lower margins until they have been opened long enough to become well established, and there are significant store opening costs associated with the locations.

I take interest as I always wanted to short CMG back in its pre-$100 days, but shares were impossible to borrow. I’m not sure whether or not it’s actually feasable to short now… but it may be worth a look. If the general market weakens, watch for the bloated CMG to lead the decline.

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