After a 16.5% rise in Fossil (NASDAQ:FOSL) stock on Tuesday, investors clearly see a good thing when they see it. But it’s worth noting that the reason for the rise is elusive. Bloomberg reported that Chief Financial Officer Mike Kovar bought 2,000 shares of his company’s stock, according to a regulatory filing. But this hardly seems like a reason for such a huge pop in the stock (On Wednesday, the company’s shares had gained another 4.6%).

But there are good reasons to consider buying this stock. Here are four:

• Great earnings reports. Fossil has been able beat analyst’s expectations without fail and has done so in all of its past five earnings reports.
• Low valuation. Fossil’s price-to-earnings-to-growth ratio of 0.9 (where a PEG of 1.0 is considered fairly priced) means its stock price is pretty cheap. It currently has a P/E of 21.1, and its earnings per share are expected to grow 24.02% in 2012.
• Increasing sales and profits and cash-rich balance sheet. Fossil has been increasing sales and profits. Its revenue has risen at an average rate of 13.6% over the last five years while its net income has increased at a 34.6% annual rate — yielding an attractive 13% net profit margin. It has a mere $4 million in debt and its cash rose at a 30% annual rate from $140 million (2006) to $402 million (2010).
• Out-earning its cost of capital. Fossil is earning more than its cost of capital – and it’s progressing. How so? It’s producing EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In the first six months of 2011, Fossil’s EVA momentum was 3%, based on first six months’ annualized 2010 revenue of $1.6 billion, and EVA that rose from $50 million in the first six months’ annualized 2010 to $95 million in in the first six months’ annualized 2011, using a 12% weighted average cost of capital.

Is it possible for a stock that has jumped 20% in two days to still be a good investment? In Fossil’s case, it looks like the answer is – quite possibly yes. After all, it has a great track record of beating expectations and earning more profit than its capital cost — and it’s cheap relative to its future earnings growth.

Peter Cohan has no financial interest in the securities mentioned.