Some companies are obviously great investments -- in hindsight. Sure, we should have bought Starbucks at its IPO and earned hundredfold returns over the years. Yet for every stock out there screaming "buy me," others simply give us a nudge and a nod. How can we tell tomorrow's obviously great investments from the thousands of pretenders?
The stars' walk of fame
On Motley Fool CAPS, these opportunities can be found among our four-star stocks. In CAPS' proprietary ratings system, they rank higher than most of the other 5,300 companies in the CAPS universe, but they're just shy of superstardom. While all the attention might be focused on their five-star peers, we can sift through CAPS to find four-star firms approaching greatness:
- Dynamic Materials (Nasdaq: BOOM )
- China Precision Steel (Nasdaq: CPSL )
- Coca-Cola (NYSE: KO )
- Universal Insurance (AMEX: UVE )
- Echelon (Nasdaq: ELON )
Some of these names might surprise you. Coke, for example, has one of the most recognized brand names in the world and was one of those cornerstone investments of Warren Buffett. Almost great? Even familiar names can still offer some of the best opportunities. Perhaps we've just forgotten the potential they still hold. However, some of the 83,000 investors in CAPS chose these companies as less obvious sources for tomorrow's great buys, so let's see why they might merit your attention.
Depends on your definition of "universal"
The property and casualty insurance business has had a quiet period for the past two years after the devastating string of hurricanes in 2005. While that has allowed the P&C insurers to enjoy higher premiums, insurers like Montpelier Re (NYSE: MRH ) have yet to be stress-tested to see if their new models can hold up under another calamity.
Some insurers, however, seem to hold more concentrated risk than others. Universal Insurance looks like one of those that has placed a large bet in one market and needs to avoid a repeat of 2005. All of its P&C business is in Florida, and another succession of storms would pose a threat to its financial stability. Yet management, which holds a large percentage of stock, is seeking to diversify geographically to minimize its risks.
The bull case
CAPS investor stockreader notes that there are a number of risks in Universal Insurance, such as "financial adequacy," but the advantages outweigh them.
1. 64% of [the] company is owned by insiders and only 12% by institutional owners (Mr. Lynch would like that)
2. the company is planning expansion to five new states (new markets)
3. and applying for the National Flood Insurance Program (new product) ...
The biggest [risk] I fear is future financial adequacy. For a small insurance company this represents a substantial risk.
You can read the complete bull case posted last month.
The bear case
The only bear pitch was penned last spring by All-Star gentletrader01, with a 93.87 player rating, who thinks that the company stands the insurance model on its head.
This is the anti-Berkshire insurance company ... UVE is completely unlike the norm for casualty insurance companies. Read Warren Buffett's letters to his shareholders to learn how this business is supposed to work. The insurer should roughly break even on underwriting, and then make its profits on investing the float from the premiums ... UVE is claiming extremely high underwriting profits while investing its assets entirely in cash. That cannot last.
A great opportunity for you
You've heard the latest on Universal Insurance, but do you agree? Are these four-star stocks still investment-grade material? On Motley Fool CAPS, you can give your input, which could influence how they're rated. Outperform or underperform, near-term or well into the future, your opinion counts.
Sign up today for Motley Fool CAPS; it's free. Let us hear what you have to say about the great and almost-great companies that interest you.