5 Stocks Approaching Greatness

There will always be companies that are obviously great investments -- in hindsight. Through the rearview mirror, we know we should have bought Starbucks or Wal-Mart at their IPO and realized 10,000%-plus returns over the years. Yet for every stock out there screaming "buy me," there are others that simply give us a nudge in the ribs and a knowing nod. They may be tomorrow's obviously great investments, but how do we tell them from the thousands of pretenders?

The stars' walk of fame
Over on the investor-intelligence site Motley Fool CAPS, we know these opportunities as four-star stocks, companies that rank higher than most of the other 5,000 stocks in the CAPS universe but are just shy of achieving true stardom. In the long shadows of stocks that garner the coveted five-star rating are top-tier companies approaching greatness.

While the full "secret sauce" of how the ratings are calculated is kept 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

Every player is rated, just as every stock is rated. The best and brightest of these players are considered All-Stars, and since they are correct more consistently than their peers, their opinions weigh more heavily in favor of (or against!) a stock.

Searching out of the spotlight
So while all the attention might be focused on the five-star stocks, good investments slip under the radar with only four stars. Yet we can sift through the CAPS database to find some of these four-star companies approaching greatness:

  • Aluminum Corp. of China (NYSE: ACH  )
  • Automatic Data Processing (NYSE: ADP  )
  • Hewlett-Packard (NYSE: HPQ  )
  • Nvidia (Nasdaq: NVDA  )
  • Vaalco Energy (NYSE: EGY  )

You might find some of these names surprising. After all, if you've ever collected a paycheck from an employer, chances are it was processed by ADP. Maybe the computer you're reading this on is an HP (mine is). Sometimes we find that the most familiar names can mean some of the best investment opportunities, because we've forgotten about the potential they still hold. Just as meaningful, the 72,000 investors on CAPS are giving these companies the nod as less obvious places to look for tomorrow's great buys. So let's delve into why these companies might merit your attention.

The nuances of speech recognition
Nvidia makes the GeForce and other graphic chips that power video game consoles, computers, cell phones, and PDAs. Although some analysts think that both Advanced Micro Devices (NYSE: AMD  ) and Intel (Nasdaq: INTC  ) may soon give Nvidia a run for its money, others continue to believe that this top chip maker has legs to run. And while there might have been some overhang as a result of the SEC's investigation into the company's stock-option grant program, Nvidia reported yesterday that the SEC concluded its exam and found nothing to go on.

More than 1,600 CAPS investors can envision Nvidia winning. More than 95% have rated the Motley Fool Stock Advisor recommendation to outperform. As the summer began, top-rated CAPS All-Star MCHSkdog outlined why he believed the potential for rivals is not an immediate threat.

A pickup in the demand for notebooks for the third and fourth quarter will be good especially for Intel and Nvidia as back to school season hits soon.

As long as Nvidia controls the 60% discrete graphics chipset space for notebooks, this stock will remain on fire. The only concern would be if Intel decided to make its own GPU for notebooks.

As ATI's products have been stuck in neutral ever [since] the AMD acquisition, NVDA should be and is dominating currently with high-end SLI desktop graphics cards.

Did I mention console graphics chips too? The recent $100 PS3 price cut announcement should help console orders and this is certainly a positive for NVDA.

Price Target: mid $50s. by early 2008.

A great opportunity for you
That's the current word on Nvidia, but what are your thoughts? Are these four-star stocks still investment-grade material? On Motley Fool CAPS, you can give your input, which can ultimately influence how they're rated. Outperform or underperform, near-term or well in the future, your opinion counts.

Sign up today for Motley Fool CAPS -- it's completely free. Let's us hear what you have to say about the great (and almost great) companies that interest you.

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