5-Star Stocks Leaders Have Soured On

Momentum investors are stock players who get behind companies that have the wind in their sails. Contrarian investors typically pick up the cigar butts that the market has tossed aside. So what do you call investors who turn against winners? Sourpusses? Shorts?

Over on Motley Fool CAPS, we sometimes call them the savviest investors around. Not only does the 65,000-strong investor-intelligence community rate thousands of stocks every day, but the players themselves get rated, too. The best of the lot -- what CAPS calls All-Stars -- consistently outperform their peers over time and are assigned ratings of 80 or greater.

When an All-Star player sours on a top-rated five-star stock, perhaps we should take notice. Maybe they've uncovered the chink in the highflier's armor. It could be they've found a question mark in the company's financial-statement footnotes. Or maybe it's just a hunch. That's why we say these tables are not lists of stocks to buy or sell, but rather starting points for further research. There are about 10,000 stocks in the universe to choose from, and this list can drastically whittle down that number. Read the pitches for or against a stock the investors write, and then dive into the financials.

Here's a list of stocks on which the All-Stars have given the thumbs-down.

Almost 4,300 investors have rated these stocks. An average of 97% of them are bullish on their prospects, with 98% of the All-Stars also thinking they'll outperform the market. What might have turned the top players in our list against these otherwise widely admired companies?

All quiet on the bear front
CAPS player grseidel doesn't see much upside left in GigaMedia because it isn't offering anything particularly unique.

I don't get the high picks on this stock. Nothing proprietary, but a well run company. I had this stock, and sold when I saw it was going nowhere. Maybe it will hit $20 per share, but not a huge upside here. Internet based gaming, this is unique? Not today....!

But in general, there's a dearth of commentary on these international stocks, which might point more to a gut feeling on investors' part than to a specific issue that would lead to underperformance. That's not the case with Frontier Oil, where top-rated CAPS All-Star wcwhiner has very precise reasons for thinking the stock isn't going to bubble up anymore:

Usually I wait until my score is worse, but I just can't see average crack spreads sitting above $15 in a slowing-growth environment and not see refiners as vulnerable. Short energy has been one of my worst ideas this last half-year, but I can't get away from the idea that a slowdown has to crimp margins. So far, so bad, but I'm sticking with the trade until I see global economic production turning up again.

Yet even here, it's tough to find many investors willing to go out on a limb and articulate a reason for their dour outlook.

Scraped knees with Volcom
It's slightly different with Motley Fool Hidden Gems recommendation Volcom, a retailer to the skate and surf crowd, which is widely seen as a "fad" retailer that will eventually stop grinding out excellence. In the top-recommended bearish pitch posted at the start of this year, sandmanuva13 posited some fundamental reasons why it will eventually lose out.

At a price of $32.70 VLCM's EV/CF ratio is around 30. Even if they continue a ROA/ROE of around 20%, they are overpriced. Analysts estimates of 25% growth seem a bit excessive based on historical niche market retail performance. It also seems like the retail channels that rely the most on VLCM are slowing their growth. Maybe it isn't a fad, and VLCM will be popular for the next 100 years. At this price though staying popular won't be enough. In order to live up to expectations, 25% more of the population needs to start buying their product. Assuming VLCM is the current [preferred] brand, this means additional people need to enter the niche, those currently in it need to stay interested AND VLCM needs to successfully fend off fairly worthy competition in a fickle market segment.

Still, Volcom has risen in value by about 35% since then. Was that irrational exuberance, or has the retailer risen above the fads?

Raise your hand
We've heard both sides here, but Motley Fool CAPS is more than what some pros think, even if they're All-Stars. It's where we invite you to share your thoughts and insights and add your voice to the debate. Go ahead, have your say. We're eagerly waiting!