7 Surprising 5-Star Stocks

Mr. Market's game is to pay you house calls on a daily basis to persuade you to buy or sell the stocks of businesses he owns or wants to own. Because of Mr. Market's bipolar affliction, he will sometimes show up at your door fantastically excited about the prospects for the future, will want a sky-high price for his stocks, and will similarly offer you premium prices for yours. On the other hand, he will occasionally become inconsolably depressed about what the future may hold and will offer to sell you his wares at prices as low as pennies on the dollar.

As an investor, your task is to figure out the value for the items that Mr. Market is hawking and buy from him when he offers low prices and sell to him when he gets too excited about certain items.

This week I've picked out seven stocks from The Motley Fool's CAPS community that were rated five stars by CAPS members, but whose price has been cut over the last 30 days. Are these examples of Mr. Market getting too depressed, or are they not top-quality merchandise after all?

So here are the week's stars on sale, as identified by your fellow Fools on CAPS. Each of the companies below had been given a five-star rating (the highest) by our community of investors just 30 days ago:

Not a single one of these seven was able to hang onto its coveted five-star rating through its troubled times. China GrenTech, Newpark Resources, and Edge Petroleum all lost just one star, but Rogers Corp. and Emageon dropped to three, and American Oil & Gas slipped to two. Compania Anonima Nacional Telefonos de Venezuela (CANTV), with the guillotine called Chavez hanging over its head, is now sitting all the way down at one star.

Where are the grins for GrenTech?
Unfortunately, regardless of the quality of the company, China GrenTech and its investment banking team just happened to have some bad timing on its IPO. Last March the stock debuted on the Nasdaq at $18 per share before being swiftly cut down by the summer doldrums that dragged down all of the U.S. markets. The poor thing hardly knew what hit it, and by August the price had been cut in half. For those stalwart investors who either kept their position or initiated a new one, it was quite the bonanza, as the stock had run up over 100% from its low by the end of the year. Celebrate? Forget it, the stock's back down 25% since 2007 said "go."

Based on the four-star CAPS rating, it seems like players think that the decline in the stock is temporary. Reading the CAPS commentary, though, made me think twice. While there were some comments that made sense to me -- such as OhhNoMrBill's comment: "I see the Chinese market growing quickly, and here is a company with a reasonable P/E ratio" -- there were also a few mentions of "momentum," "cup and handle," and "support and resistance." As far as red flags go, grochen topped it off by commenting alongside an outperform rating, "bailing out, trying to cut my losses" -- an interesting mixed message.

Taking a quick look back at the company's third-quarter earnings announcement, I could see why there might be some people questioning what may be ahead for the company. After growing at a 63% CAGR between 2001 and 2005 (before its IPO), the company has seen revenue growth drop off quickly. Revenue is only expected to be up 15% to 20% for the fourth quarter, which is seasonally the company's strongest. For all of 2006, the company expects revenue to be up 14% to 17%. A big reason for this slowdown has been China Unicom's decreased spending on CDMA products. For the third quarter, Unicom accounted for more than 50% of GrenTech's sales, yet the sales total to Unicom had grown just 1% over 2005.

Along with the slowing top-line growth, GrenTech is also feeling a margin squeeze at least partially due to China Mobile's new centralized procurement policy. GrenTech is expected to finish 2006 with gross margins between 45% and 48% and net margins in the 16% to 19% range. This is somewhat of a drop-off versus the 56% gross margins and 25% net margins the company posted in 2005.

Trading at just 13 times trailing-12-month EPS, the stock does not appear expensive relative to its competitors. GrenTech is, after all, selling wireless coverage products and services into perhaps the best global wireless market. But figuring in slowing sales growth, declining margins, and a healthy dose of uncertainty around a 50% customer, it may be tough to call that 13 multiple particularly cheap.

So the question is: Do you think GrenTech has what it takes to kick its growth and margins back up a notch and beat out the S&P 500? Log onto The Motley Fool's investing community, CAPS, and let the other 20,000 players know what you think. Heck, even if you think GrenTech is priced fairly, there are well over 3,000 other stocks to check out and share your thoughts on in CAPS. So join today -- it's way more fun than watching that Ronco rotisserie infomercial again!

For more CAPS coverage:

• The Best Retail Stock for 2007
• 5 More High-Star, Low-Priced Stocks
• 3 More Kings of Cash

Not on CAPS yet? Fool contributor Matt Koppenheffer says "I pity the fool that ain't on CAPS." He does not own shares of any of the companies mentioned. The Fool's disclosure policy is tougher than BA Baracus himself.