7 Surprising 1-Star Stocks

Expectations are everything in investing. If figuring out what a company is going to do in the future were as simple as looking at 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 calculate the exact returns we could expect. In that scenario, we'd also lose all excess returns since, without the risk of the unknown, stocks would look a whole heck of a lot like another basically riskless investment vehicle -- U.S. Treasuries. How much fun would that be?

But that's not the case -- not even close. We don't even have perfect information about the past, let alone any guarantee that we could use the past to predict the future for stocks. 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 make estimates for 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.

So I've turned to The Motley Fool's CAPS community, where investors of all walks of life have weighed in with their thoughts on more than 3,600 stocks, and I've come up with a handful of unloved stocks that have defied everyone's expectations. The question, though, is whether these stocks are better than anybody thought, or whether they are just getting their one day in the sun.

Here are this week's scorching seven, as identified by your fellow Fools on CAPS. Our community of investors gave each of these companies a one-star rating -- the lowest -- just 30 days ago.

The recent gains didn't do much to change the ratings for these stocks on CAPS. Ionatron, Telik, Vanda, Blockbuster, and Benihana are all still hanging at one star. CytRx and Globecomm got bumped up, but only slightly.

CytRx in the sights
RNA interference (RNAi) therapeutics may not be paying the bills at CytRx any time in the near future, but it is definitely causing a lot of excitement at the company. RNAi is a gene-silencing process in which an interfering RNA molecule is used to target a specific gene expression. The concept was originally discovered by plant scientists who turned petunia plants white by accident when they were attempting to change just the color of the flower's petals. In 2006, Craig C. Mello and Andrew Fire received the Nobel Prize for their work in showing RNA-induced gene silencing in roundworms.

Earlier this month, CytRx announced the formation of a subsidiary, RXi Pharmaceuticals, that will focus solely on the development of RNAi technology and RNAi therapeutics. Initially, the company received CytRx's RNAi assets, but subsequent press releases by CytRx -- each of which caused the stock to jump by more than 10% -- announced that RXi would have access to not only past RNAi research from the University of Massachusetts Medical School but also any RNAi technology that the school develops in the next three years. Significantly, the University of Massachusetts Medical School is where Mello hangs his hat as a Distinguished Professor of Molecular Medicine. CytRx owns 85% of RXi, with the remaining 15% in the hands of the company's scientific advisory board, which includes Mello. After Merck purchases Sirna Therapeutics, RXi's major competitor is expected to be Alnylam Pharmaceuticals.

For CytRx, though, the drug that would be the first to potentially hit the market is arimoclomol, a small-molecule therapeutic using CytRx's molecule "chaperone" technology. The compound is designed to treat amyotrophic lateral sclerosis (ALS), also know as Lou Gehrig's disease. The drug just finished phase 2a trials, in which the primary endpoint was safety and tolerability and the secondary endpoint was an initial look at efficacy. The drug met the primary endpoint and did show signs of efficacy, though the results of the secondary endpoint were not statistically significant. CytRx expects that phase 2b trials will begin in the third quarter of 2007 and will last approximately 18 months. The FDA has granted both fast-track status and orphan-drug status, but success is still a long way off.

CAPS members who have spoken out seem to like the company based on its high-caliber research team. CAPS All Star grampa9 cites the board members as a good qualitative aspect of the company but calls his pick a gamble: "I approach it as one would the idea of buying land on the far fringes of an urban area in anticipation of growth. It will take at least 10-20 years to determine success or failure."

Blockbuster's back
This is the second time Blockbuster has shown up on this list of outperforming one-star stocks, yet the friendly neighborhood movie-rental agency can't win enough CAPS members' love to get above one single, lonely star. Of the 594 CAPS members who have weighed in on Blockbuster, 295 have given a thumbs-down, and 73 of the 144 All-Stars that have rated the stock have done the same. Why so much ill will? Recently, fellow Fool Anders Bylund asked the same question and also pointed out where some of the big boys have weighed in.

Anecdotally, I just signed up for Blockbuster's Total Access Plan, and it's fantastic -- movies in the mail and a store right around the corner where I can exchange them for new ones whenever I want. The deal is so good that the clerk at the Blockbuster store said a lot of people aren't switching away from Netflix service because they don't believe him when he gives the details of the offer. Being a movie buff, I sure hope this program goes on forever, but a good deal to the customer does not always mean profitable business for the company. In the case of Blockbuster, the company has to overcome significantly more overhead than its comparatively agile competitor -- and the gap could widen even more as Netflix begins offering movie and TV downloads over the Internet.

Want to help tip the scales upward on Blockbuster? Or do you think the new Total Access Plan will get it nowhere? Get your CAPS groove on, and let the other 20,000 players know what you think. When you're done, be sure to check out some of those other fast-moving one-stars.

More related Foolishness:

• Biotechs need validation, too.
• The next Netflix?
• The evolution of Ionatron.

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. Netflix is a current Motley Fool Stock Advisor pick. Merck is a former Income Investor choice. The Fool's disclosure policy is always expected.