7 Surprising 1-Star Stocks

Successful investing requires you to think independently, and have the conviction to stick to your guns. This can be difficult enough when you're looking at a stock that the media and analysts generally like -- after all, in the stock market, there's a seller for every buyer. But it becomes a far thornier proposition with stocks that can't seem to find good press or bullish investors anywhere.

Of course, going against popular opinion has led to great returns for many contrarian investors. In that spirit, I've headed to the Motley Fool CAPS community to dig up some unloved stocks that have delivered big gains to shareholders over the past month. Our community of investors had given each of these companies a one-star rating -- the lowest possible -- just 30 days ago:

Stock

30-day return

One-year return

Current CAPS Rating

Valence Technology (NASDAQ:VLNC)

22.0%

9.9%

*

Triad Guaranty (NASDAQ:TGIC)

12.2%

(83.6%)

*

Brookfield Homes (NYSE:BHS)

11.1%

(48.6%)

*

Waddell & Reed Financial (NYSE:WDR)

9.2%

22.3%

*

Rentech (AMEX:RTK)

8.9%

(43.8%)

**

salesforce.com (NYSE:CRM)

8.0%

35.2%

*

Casella Waste Systems (NASDAQ:CWST)

7.3%

33.8%

*

Data from Motley Fool CAPS as of Nov. 21, 2007.

Now I'm not recommending that you run out and buy these stocks! Their low ratings are a big flashing red light. CAPS players have been pretty adept at picking out good stocks, and even better at pointing out stocks to avoid. In fact, an index set up to short the least-liked stocks in CAPS has outperformed more than 99% 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 today's table might be one of those undercover rockets.

Do research? You're kidding!
That's right, the best way to figure out whether any of these stocks is worth considering for your portfolio (real or CAPS) is to roll up your sleeves and dig in a bit. What we're looking for here are stocks that have good fundamentals despite the lack of popularity: a profitable business, good management, and decent growth prospects.

Now which of these would I skip? Well, even though fellow Fool Tim Beyers likes salesforce.com's cash flow and thinks that it could be a buyout candidate, and Fool Rich Smith has argued that the stock is fairly valued, I still think that a multiple of more than 50 times cash flow is more than I'll be willing to pay.

And, as I've mentioned before, I'm not ready to jump into the homebuilder melee yet, so Brookfield Homes is also out. And speaking of housing, Triad Guaranty -- which insures mortgages from default -- just got its credit rating lowered by S&P due to the ever worsening housing and credit markets.

Waddell & Reed, however, is a bit more interesting. This is a financial services company focusing on financial advisory services and investment products primarily for individual investors. Over the past few years, the financials for Waddell & Reed haven't looked too pretty, as profit fell even as revenue was climbing. Through the first nine months of this year, though, it appears to have things moving back in the right direction.

CAPS All-Star ORAY817, one of the 17 bulls for the stock on CAPS, commented:

[Waddell & Reed's] investment performance is solidly growing. Sales force retention is far above industry ... [the] concept makes sense to clients and they don't go away.

So what's your take on Waddell & Reed? Head over to CAPS and let the community of more than 75,000 Fools 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 5,000-plus stocks on CAPS.

More CAPS Foolishness:


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  • Report this Comment On August 29, 2009, at 7:10 PM, einsteinpfleet wrote:

    RTK went to two stars, but it deserves more. Strong blow out quarter due to fertilizer business will be repeated next quarter, especially with the price of natural gas below 3. All of the announcements for the proprietary synthetic diesel fuel, both for commercial and military use, are the tip of the iceberg. RTK is going to go higher before the end of this year --- a lot higher.

    Disclosure: I'm long this stock and remain long.

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