Unloved Stocks Ready to Shine

Investor sentiment can be a powerful force in moving stocks. It's like a pendulum that can swing in a company's favor. When investors begin to think highly of your company, it might be a sign that the stock will also start heading in the right direction.

Yet knowing when investors are beginning to warm up to a stock isn't always easy. Often, you can only tell after the stock has moved up -- but by then, it may be too late.

An astrolabe for investors
Investors at Motley Fool CAPS, however, have a way to monitor the progress of investor sentiment. Like every player at CAPS, each stock is given a rating from one to five stars, with five being the best. While the full "secret sauce" of how the ratings are calculated is proprietary, there are three factors that influence a stock's star rating:

• Whether a stock is rated "outperform" or "underperform"
• The length of time it is expected to perform (a few months or a few years)
• The ratings of the investors who make the picks.

Like astronomers scanning the skies, investors can then track the movement of the stars. A stock's CAPS rating trend shows how investors feel about the stock over time, whether its star rating is on the upswing or trending down.

Investors can then use this information to help decide whether it may be a good time to invest in the stock. Here we're looking at low-rated stocks -- companies that had the lowest one-star rating -- that have recently seen their ratings rise to two stars. This table lists some better-known stocks that have seen the stars start to align for them.

Obviously this is not a list of stocks to buy, but rather a starting point for further research. Consider these two examples: Sirius saw its rating improve in August, just as its share price began to rise, seemingly underscoring the usefulness of watching the CAPS trend. But Research In Motion began to move up in price in June, while its rating didn't begin to advance till July.

Does that negate the value of this strategy? Not at all! While the BlackBerry maker did jump at the end of June, rising from about $55 a share to the mid-$70s in July, it gave some of its share appreciation the following month, just as CAPS investors got interested. In August the stock surged again, rising to a high of $88 a share, about a 33% increase in just one month.

It still pays to keep your eyes on the stars.

Networking for profits
Internet-based voice services equipment provider Sonus Networks might be one to benefit most from a change in investor sentiment. With its stock down year to date, and trading at three-quarters the value of the highs it reached at the end of July, nearly 90% of the investors who have rated Sonus believe it will outperform the market.

New CAPS player JedediahSmith believes its market position will attract the telephone companies to its VOIP products.

Massive market share for VoIP switching. Expect to see increased demand by traditional telcos and wireless operators for SONS products.

That's not to minimize the significant challenges facing the company. Industry research firm and CAPS All-Star Netscribes agrees Sonus needs to get the major carriers to sign on, but presciently noted that its growth prospects hinge on such alliances.

While the company is targeting a potentially huge market, its growth prospects pivot around its ability to win new business from large incumbent carriers. Endorsing its relationship with telecom major Verizon (NYSE:VZ) and Qwest (NYSE:Q), Sonus' revenue growth could easily see strong double-digit growth in 2007. Likewise, an improved operating performance is being anticipated as the firm benefits from strong demand and increased scale.

When that didn't happen by the end of the second quarter, as carriers shifted capital spending to the second half of the year, the market abandoned Sonus' stock. This leaves open the possibility of much better performance in the back half of the year.

Shine your starlight
We know where the bull and bear positions are, but we haven't yet heard from you. At Motley Fool CAPS every investor's opinion counts. Weighing in with yours could be the difference between these stocks becoming shooting stars or supernovas. Considering it's free to sign up, and free to post your thoughts, why not use this opportunity to take your star turn?