7 Surprising 1-Star Stocks

Expectations are everything in investing. If predicting a company's future moves were as simple as studying historical performance, we'd all be experts at equity analysis. We'd know exactly what every company is going to do in the future, and we'd calculate the exact returns we could expect. In that scenario, we'd also lose all excess returns; without the risk of the unknown, stocks would look a lot like another basically riskless investment vehicle -- U.S. treasuries. How much fun would that be?

But we don't even have perfect information about the past, let alone any guarantee that we could use that past to predict stocks' future. As we all know, "historical results may not be indicative of future performance." So we look at historical results, along with a host of other things, and estimate what we think might happen in the future to the economy, the company's industry, and the company itself. And sometimes, we're oh so wrong.

What happens, though, when a stock defies not only the set of expectations that we (individually) have come up with, but those that we (the collective) have come up with? Much of the time, it's just the result of investors getting a bit excited, either overselling a stock or pushing it way up despite a lack of change in the stock's overall quality. Sometimes, though, a fundamental change at the company makes the stock actually worth more -- or perhaps everyone was just wrong to begin with. With that in mind, I've dug up seven stocks that had been rated just one star in The Motley Fool's CAPS community, but have had a really nice 30-day run since.

Here are this week's scorching seven, as identified by your fellow Fools on CAPS. Each of the companies below had been given a one-star rating (the lowest) by our community of investors just 30 days ago:

Stock

30-day return

One-year return

Red Hat (NYSE: RHT  )

34.7%

-17.5%

Cowen Group (Nasdaq: COWN  )

27.9%

N/A

Jones Soda (Nasdaq: JSDA  )

26.9%

132.1%

Nortel Networks (NYSE: NT  )

24.3%

-12.9%

Raser Technologies (NYSE: RZ  )

23.4%

-61.8%

GPC Biotech (Nasdaq: GPCB  )

23.1%

104.5%

Goodyear Tire & Rubber (NYSE: GT  )

23.0%

19.2%

Data provided from Motley Fool CAPS as of Jan 1.

Despite their gains, three of these stocks -- Jones Soda, Raser Technologies, and GPC Biotech -- are still stuck at one star. CAPS players, though, boosted the rest from the ignominy of a single star. Red Hat, Nortel, and Goodyear all gained a second star, while Cowen leapt all the way to five stars.

Don't call me a one-star
Some might say it's a bit of a fluke that investment banking firm Cowen Group is showing up among former one-star CAPS stocks. After all, just a single underperform call sunk the stock to the bottom. Nonetheless, it's still a good opportunity to check out one of the group of boutique investment banking firms that have recently come public.

Up 32% since its July IPO, Cowen joins competitors such as KBW (NYSE: KBW  ) , which is up 40% since its IPO, and Evercore Partners (NYSE: EVR  ) , which is up 75% since its market debut. Cowen trades at 16 times 2007 EPS estimates, a multiple far greater than those of investment-banking big boys like Lehman Brothers (NYSE: LEH  ) and Bear Stearns (NYSE: BSC  ) . Both of those behemoths trade at around 10 times 2007 estimates, but Cowen still lags Evercore and KBW, which carry forward EPS multiples of more than 20.

Since Cowen was handed its one and only underperform rating back in November, it's received eight straight outperform ratings by CAPS players, including two from CAPS All-Stars. Though it enjoyed revenue growth of 16% through the first nine months of 2006, Cowen's operating margins eroded during 2005. Now that Cowen has ascended from one star, the question may be whether it deserves to stay at its current five stars. Why not cast your vote? Check out Cowen on CAPS.

Canadian bacon
If you get a sharp pain in the base of your skull when you hear the name "Nortel," you just may have Internet-bubble PTSD. Nortel is certainly no Pets.com, but the company took a ride similar to some other Internet-era floppers such as Time Warner (NYSE: TWX  ) and Lucent Technologies (NYSE: LU  ) . Worse yet, Nortel is one of the poster children for accounting irregularities.

With the market for networking guts looking up again, and competitors like Cisco (Nasdaq: CSCO  ) showing promising results, can Nortel turn it all around? CAPS newcomer ult1matebrown seems to think so. He thinks that the new management, and the CFO in particular, have an eye toward "reducing needless expenses and only participating in areas of business where they can be a major player."

CAPS player Zikar doesn't agree, though, asserting that "management changes have failed to improve the company, so I see it underperforming for quite some time." Has Nortel turned the corner, or is there still more disappointment to come? Check out Nortel on CAPS.

It might not be high time to add some of these unloved stocks to your portfolio, but at the very least, a few of these could be excellent candidates for further due diligence. In the meantime, get in the game and get yourself heard in the CAPS community. You'll also be able to read timely analysis from our community, and perhaps offer your own pitch for one of these stocks. CAPS is entirely free, and unlike my Honda Civic, it's definitely a place where "the more the merrier" is actually true.

More year-end Foolishness:

Foolanthropy is celebrating its 10th year! To learn more about our five Foolish charities or to make a donation, visit www.foolanthropy.com.

Time Warner is a post-Internet-bubble Motley Fool Stock Advisor pick. See all of David and Tom Gardner's superior stock selections with a free 30-day trial subscription.

Fool contributor Matt Koppenheffer didn't see these particular moves coming, but he's rarely surprised at Mr. Market's general tomfoolery. He does not own shares of any of the companies mentioned. The Fool's disclosure policy is always expected.


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