7 Surprising 1-Star Stocks

Surprises are part of the game when it comes to picking stocks. Sometimes this can mean bad news, like one of your top stocks revealing that management has been backdating options.

Other times, though, the market gets caught off guard by positive surprises from stocks that most investors thought were down for the count. In this situation, investors who stood by the stock often break out into a chorus of "I told you so," as short-sellers are forced to figure out just how much pain they can take.

To dig up some of these unloved stocks that have been defying naysayers, I'm turning once again to The Motley Fool's CAPS community. 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

Current CAPS Rating (out of five)

Avanir Pharmaceuticals (NASDAQ:AVNR)

129.3%

(73.1%)

*

Calpine (OTC BB: CPNLQ.PK)

103.8%

N/A

*

Document Security Systems (AMEX:DMC)

46.5%

2.8%

*

US BioEnergy (NASDAQ:USBE)

46.0%

N/A

*

Amazon.com (NASDAQ:AMZN)

44.4%

58.5%

*

Regeneron Pharmaceuticals (NASDAQ:REGN)

41.8%

94.1%

*

BCE (NYSE:BCE)

35.6%

44.6%

**

Data from Motley Fool CAPS as of April 25.

It's important to remember that some of these stocks, particularly the smaller, more volatile ones, could just as easily reverse these big gains over the next 30 days. In some cases, though, the strength could be a sign that the prospects for the company have changed for the better, or that it had been beaten down just a little too far.

So the question with these stocks is: Are they better than CAPS players had thought, or are they just singing that proverbial swan song? The best way to get a feel for where these guys are headed is to dig in and do some research. I thought I'd kick you off with some thoughts on Amazon.com.

Amazon zooms
When searching for low-rated stocks that have made big enough upside moves to land them on this list, I'm usually met with seven stocks most people have never heard of. So this week, when Stock Advisor pick Amazon.com made the list, thanks in large part to its massive 27% post-earnings jump, I got excited.

Amazon's quarter certainly was something to talk about. Its reported earnings per share of $0.26 not only more than doubled the $0.12 from the first quarter of last year, but was well above Wall Street analysts' estimates of $0.15 per share.

Results shone across the board. Media products, which still make up the majority of Amazon's sales, were up a respectable 26% year over year, but the company saw a 48% jump in the sales of electronics and "other general merchandise." Additionally, CEO Jeff Bezos highlighted the important contribution that the company's two-day shipping membership program, Amazon Prime, is making. It should be noted, though, that the great bottom-line results were due in part to a lower effective tax rate of 23% for the quarter versus 47% for the prior year.

The real question, though, may be how Amazon ended up as a one-star stock on CAPS. Its 356 underperform ratings (out of 885 total ratings) make up one answer. The comments on the CAPS page for Amazon paint an even redder picture; even after the nice quarter (or maybe because of the stock's run-up after the quarter), the bears have been prolific and vocal.

A major running theme for the bears seems to be the price of Amazon's stock -- a concern that may be redoubled now, with the stock up big. Including the first quarter's great results, the stock is trading at 96 times its trailing-12-month EPS. CAPS player stevesliva sums up the valuation issue succinctly with, "2000 called, it wants its P/E back." Tigerofice adds, "[T]he stock flew up because of the earnings surprise and subsequent short squeeze. The outlook for the company is better than before, but the stock price will decrease after this huge run up."

Granted, most of the players don't seem to think the underlying business is bad per se, just not worth the multiples the stock is trading at. After all, what do you get when you combine a good company with a stock price that's too high? Often, a bad investment.

So do you think the run-up in Amazon was warranted? Or is it finally time for the stock's price to get in line? Head over to CAPS and let the community know what you think. While you're there, you can start your research on any of the other stocks listed above -- or any of the 4,400-plus stocks on CAPS.

More CAPS Foolishness:

See the original pitch for Amazon, and dive into the archive of all past picks, with a 30-day free trial of Motley Fool Stock Advisor.

Fool contributor Matt Koppenheffer didn't see these particular moves coming, but he's rarely surprised at Mr. Market's general tomfoolery. You can check out Matt's CAPS portfolio here, or visit his blog. He does not own shares of any of the companies mentioned. What has two thumbs and keeps everything out in the open? The Fool's disclosure policy.


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