Piggybacking on the picks of great investors and money managers can often lead to big rewards -- especially when the stocks in question are beaten down.
If Buffett's buying railroads, then perhaps that's a place to look. Does Bill Miller think financial stocks are beaten down? Maybe investigating them more closely will help improve your own results.
Over on Motley Fool CAPS, more than 78,000 professional and novice investors have rated more than 5,300 stocks, indicating whether they think those companies will beat the market or lose to it. The best investors -- those who consistently outperform their peers -- are considered All-Stars. They might not match Buffett, Lynch, or Miller yet, but their records are remarkable all the same.
The best of the best
Each All-Star boasts a CAPS rating of 80% or more. That's plenty good, but I want to see which companies the very best All-Stars are choosing. So I search CAPS for players with a rating of 90% or better. Then I look for those who've chosen one- and two-star stocks to outperform the market.
Why low-rated stocks? Because although the majority of CAPS investors may think these stocks are dogs, our top All-Stars believe they'll have their day. It's a typical contrarian investor concept -- what value investing legend Benjamin Graham called "picking up cigar butts."
Here are five low-rated stocks that have recently gotten the nod from the cream of our CAPS All-Stars:
|
Company
|
CAPS Rating
|
1-Yr. Return
|
CAPS All-Star
|
Player Rating
|
|
Trina Solar (:TSL)
|
*
|
151.8%
|
chuckfoss
|
96.18
|
|
State Street (NYSE:STT)
|
*
|
24.0%
|
BuffetClone
|
96.76
|
|
JER Investors Trust (NYSE:JRT)
|
*
|
(30.4%)
|
johnnymack91362
|
98.96
|
|
Fannie Mae (NYSE:FNM)
|
*
|
(33.7%)
|
SavvyCaveman
|
99.84
|
|
Circuit
City (NYSE:CC)
|
*
|
(74.8%)
|
playingtheturns
|
96.76
|
Source: Yahoo! Finance.
Typically, there's a low-rated stock that's also enjoyed a large one-year run-up in its stock price, which leaves me leery of considering it as a possible investment. Not that stocks can't continue to run after a big rise, but their high valuations -- even with their low ratings -- leave me a little cold. This week, Trina Solar is that stock.
Trina went public just a year ago and already it's more than doubled in price. Although the prospects for solar energy happen to be bright right now, there are a lot of players in the field, some of which may be better positioned than Trina. First Solar (Nasdaq: FSLR ) , for example, is profitable and is seen as one of the few companies that could survive without government subsidies.
A stated benefit
State Street, on the other hand, has been weathering the credit storm much better than many of its rivals, reporting third-quarter profits up 29% from the year before. While facing a number of shareholder lawsuits over its bond portfolio, it also managed a collateralized debt obligation (CDO) that was downgraded by rating agency Standard & Poor's because State Street decided to liquidate the CDO's assets. Yet State Street says there is no financial impact to it since it's just the manager rather than an investor. Despite the uncertainty involved, the stock is worth a closer look.
On CAPS, State Street is in an unusual position. Nearly 60% of the almost 200 investors who have rated the stock expect it to outperform the market. Yet when you look only at All-Stars, you get a different picture: 60% of All-Stars who rated the stock expect State Street to underperform.
But those CAPS All-Stars who are optimistic about the company's prospects point to management and say it's a well-run institution. That's perhaps best summed up by the industry analysts at NetScribe, who last year pointed out its low exposure to the riskier elements of the market.
It gets less than 1/5th of its income from the traditional banking avenues and is not affected by the credit exposure or interest rate fluctuations. However the securities lending business would profit from reduction of overnight rates. Loan's form 8% of the assets and are toward processing customers to facilitate trade which are backed by collateral ...
... The fortune of the bank is highly leveraged on the capital market operations and derives 2% income growth for every 10% increase in Standard and Poor's 500. The bank is going on the right track with increased custody flows, generating new business, appreciation of global equity markets, improved efficiency and is all set for a bull run.
You can read the full pitch by clicking here. You'll also find bearish arguments against the stock, which point out that even the low exposure to the CDOs like those mentioned above could still impact operations.
Finding value under rocks
So there you have it -- five low-rated laggards that have gotten a big endorsement from some of the best and brightest investors in the CAPS community. What do you have to say? If you want to add your two cents, sign up to join the Motley Fool CAPS community. There's no charge.
For every post you make to CAPS or any Foolish discussion board in the month of December, The Motley Fool will donate $0.02 to charity. So give us your 2 cents and we'll pay it forward!
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