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 the 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 5)
|
|
Novastar Financial (NYSE: NFI)
|
62.1%
|
(65.9%)
|
*
|
|
Fremont
General (NYSE: FMT)
|
71.6%
|
(36.1%)
|
*
|
|
Raser Technologies (NYSE: RZ)
|
25.4%
|
(4.5%)
|
*
|
|
American Oil & Gas (AMEX: AEZ)
|
44.5%
|
50.8%
|
*
|
|
WorldSpace (Nasdaq: WRSP)
|
35.9%
|
25.3%
|
*
|
|
Shiloh
Industries (Nasdaq: SHLO)
|
46.8%
|
(27.9%)
|
*
|
|
Integrated Electrical Services (Nasdaq: IESC)
|
33.5%
|
NA
|
*
|
Data from Motley Fool CAPS as of June 20.
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 Fremont General and Novastar.
The boom that is no more
Here's a news flash for you: Up until recently, the housing market in the U.S. was booming. No, don't run out and try to get yourself on the list for the next Miami condo development -- the boom is over. I know, I know, I'm disappointed too.
As we all know, the end of the housing boom came with some not-so-tasty side dishes. The most bitter of these was the debacle in the subprime loan industry, which has left many lenders like Fremont and Novastar cowering in the corner and licking their wounds. But where there's blood, there's often opportunity.
Stocks of both Novastar and Fremont were knocked down to just a fraction of their tangible book value (shareholder equity less goodwill and intangible assets). The reason for the huge decline was a largely because of two things: worries over these companies' ability to generate good operating results, and the potential decline in value of the loans they hold on their balance sheets.
As is often the case when the entire market appears to agree on something -- in this case, "subprime bad" -- there seems to have been some overreaction. Fremont, which has sold its commercial real estate lending business and is exiting subprime lending, is now trading for more than twice its low for the year. Novastar has made an even bigger rebound, nearly tripling since its low in March.
Now comes the tricky part. These companies seem to be stabilizing, and more people will likely start to look at these stocks again. Can further recovery be squeezed out of them, given their big rebound?
On CAPS, both these stocks attract no shortage of bears. But recently a number of CAPS All-Stars -- ranked in the top 20% of all players -- have turned positive on them. For example, MillionGuy describes Novastar as "a badly beaten down stock in the mortgage sector" and says he expects further recovery ahead. WSMOOT19 adds that Novastar is a "great takeout candidate."
Do you agree that these discarded stocks might still offer more gains? Or have they already completed their recoveries? 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 4,600-plus stocks rated 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 is never going to give you up, it's never going to let you down, and it's definitely never going to run around and desert you.
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