7 Surprising 1-Star Stocks

Surprises are part of the game of picking stocks. Sometimes you get bad news -- like one of your top stocks revealing that its investment holdings are chock-full of bonds backed by failing subprime loans.

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, 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 possible, from our community of investors just 30 days ago.

Stock

30-Day Return

One-Year Return

Current CAPS Rating

Accredited Home Lenders (Nasdaq: LEND  )

82.1%

(68.7%)

*

Avanir Pharmaceuticals (Nasdaq: AVNR  )

26.8%

(64.9%)

*

EarthLink (Nasdaq: ELNK  )

20.1%

8.9%

*

Lattice Semiconductor (Nasdaq: LSCC  )

19.7%

(27.2%)

*

Marshall Edwards (Nasdaq: MSHL  )

19.6%

12.6%

*

Massey Energy (NYSE: MEE  )

18.5%

7.2%

**

Cypress Biosciences (Nasdaq: CYPB  )

16.4%

103.3%

**

Data from Motley Fool CAPS as of Sept. 12.

I'm not recommending that you run out and buy these stocks! Their one-star ratings are a big, flashing red light. CAPS players have been pretty adept at picking out good stocks, and even better at pointing out bad stocks to avoid. In fact, an index set up to short the least-liked stocks in CAPS has outperformed nearly 98% of all other CAPS players.

In other words, most stocks that are rated with one star in CAPS are likely to underperform. However, CAPS players aren't perfect. They've been overly negative on stocks such as Crocs and DryShips, both of which have delivered seriously impressive returns to their investors.

So the question is whether any of the stocks in that table might be one of those undercover rockets. To kick off your research, here are some of my thoughts on Massey Energy.

The old man of the energy family
When it comes to energy, oil is the hands-down rock star. Natural gas is the nice, but soft-spoken and sometimes ignored, younger brother, while nuclear is the hulking cousin who's pumped himself so full of steroids that nobody really trusts him. Solar, wind, and hydro power are the group of really smart kids who have plenty of great ideas, but are flaky when it comes to carrying them out.

And what of coal? Coal is the rugged old man with deep, leathery lines in his face. He rides a motorcycle, loves a good fist fight, smokes like a chimney, and drinks Jack Daniel's by the gulp. But today, there are various efforts afoot to clean up coal's act -- you know, get him to cut back on the smokes and say "please" and "thank you" a little more.

While many, such as CAPS player jcarrott, will say that coal is "cleaner than at any time in the past," many others aren't as convinced. If you recall the haggling over the proposed buyout of utility giant TXU, one of the concessions was to pull its plans to build eight new coal-fired plants. Nobody wants Old Man Coal in their backyard.

A better image for coal would certainly benefit Massey, which earns its keep by producing and selling bituminous coal. Recently, Fitch Ratings released a statement that said increased coal demand, driven by exports and electrical generation and combined with lower inventories, should bolster the fundamentals for the coal industry. In addition, Massey announced it will be putting more focus on coal used for metallurgical purposes, which currently sells for around 60% more than coal used for electricity.

Despite the recent Fitch comments, Wall Street firms are split on the industry. In late August, Bank of America lowered its targets on coal producers, as it pointed to production cuts and a slower price recovery than expected. A day later, UBS said nearly the opposite and upgraded the sector -- and Massey specifically -- when it claimed that it saw an upswing on its way for the sector.

Massey also faces litigation from the government over violations of the Clean Water Act. Although the company has not seemed overly concerned about the lawsuit, CAPS All-Star dfwinvestor thinks it's a big deal, and said the company is "downplaying a serious litigation risk that likely will spread."

So will Massey benefit from a coming wave of demand for coal? Or is there just too much working against coal and Massey? 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 we mentioned here or any of the other 5,000-plus stocks that have ratings on CAPS.

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