Surprises are part of the game when it comes to picking stocks. Sometimes this can mean bad news -- say, one of your top stocks revealing that its 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 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, naysayer-defying stocks, I'm turning once again to The Motley Fool's CAPS community. Each of the companies below had received a one-star rating (the lowest) from our community of investors just 30 days ago:
|
Stock |
30-day return |
One-year return |
Current CAPS Rating |
|---|---|---|---|
|
Xenoport |
39.7% |
76.6% |
|
|
City Telecom |
24.8% |
133.5% |
|
|
Pre-Paid Legal Services |
22.8% |
84.8% |
|
|
Owens-Illinois |
21.3% |
89.1% |
|
|
Home Solutions of America |
20.9% |
(50.9%) |
|
|
Spectrum Brands |
20.2% |
(51%) |
|
|
WorldSpace |
19.9% |
(33.1%) |
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 company's prospects have changed for the better, or that it had been beaten down just a little too far.
Are these stocks 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 Pre-Paid Legal Services.
A pre-paid pop
Since Pre-Paid Legal Services is making its second appearance on this list in 2007, I couldn't help taking a closer look at it. It previously showed up the critics in late March, when it jumped 26% in the course of a month. It's since added 23 percentage points to that gain, up an impressive 85% in the last year.
Pre-Paid Legal is a pretty straightforward idea. In exchange for a monthly premium of around $26, members are entitled to legal services though Pre-Paid Legal's network of law firms. Mind you, Pre-Paid doesn't include remedies for an exhaustive list of potential legal snafus, but it does cover many of the most common occasions where a lawyer might help.
The recent run-up was helped by the first-quarter earnings Pre-Paid Legal released April 23. Revenue rose a paltry 2% year over year, but flat operating expenses led to a 13% increase in net income. The company also continues to aggressively buy back shares with its excess cash flow; as a result, diluted earnings per share rose 29% over the first quarter of 2006.
As suggested by its low rating in CAPS, as well as the mention in its shareholder letter that the company believes that it has been "under an extraordinarily severe short attack that has lasted five and a half years," not everybody is a fan of Pre-Paid Legal. There are 57 Pre-Paid Legal bulls on CAPS, though, and many of them have chimed in with thoughts on why they think the stock still has some juice.
kahunacfa shares: "Pre-Paid Legal is a company that I just recently discovered. Although my research is not complete on the company, I like the concept of pre-paid legal services, and I believe that the company is relatively undiscovered. In my opinion the stock is an excellent value with long-term earnings growth prospects exceeding 20%."
CAPS All-Star FoolishRobbb adds that the company should benefit from a growing number of people realizing that they need legal services. He also notes the stock's low P/E and the company's "innovative sales strategy."
It's also interesting to note the number of comments on Pre-Paid Legal from CAPS players with just a single stock in their CAPS portfolio: Pre-Paid Legal. Let's just say that those comments should probably be read with a rather large grain of salt.
Do you think Pre-Paid Legal will continue to prove critics wrong? Or do the shorts have it right after all? 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 4,500-plus stocks on CAPS.
More CAPS Foolishness:
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. The Fool's disclosure policy thinks that Peet's espresso drinks beat Starbucks' hands-down.
