Unloved Stocks Ready to Shine

Think of investor sentiment as a pendulum that swings in tandem with a company's share price. When investors begin to think highly of your company, its stock might also start heading in the right direction. Alas, you can rarely tell when investors are warming to a stock until after it's made that upward swing.

An astrolabe for investors
But Motley Fool CAPS' proprietary ratings, aggregated from the opinions and accuracy of 83,000-plus investors, offer a great way to monitor investor sentiment. Like astronomers scanning the skies, investors can follow a stock's stars through its CAPS rating trend, tracking investor sentiment to help determine the best time to invest. Let's look at former one- or two-star-rated companies that have recently enjoyed a bump in investor confidence and see whether the stars are really aligning in their favor.

Obviously, this is not a list of stocks to buy -- just a starting point for further research. Still, consider the case of Capital One, which we highlighted two weeks ago. CAPS investors downgraded the financial company at the end of August, while the market was still bidding up its shares. In November, the company announced that it was charging off hundreds of millions of dollars because of persistent delinquencies and the declining housing market. Its shares dropped 15% that day, and it's been falling ever since. Yet now CAPS investors are starting to look up again, and the shares have followed suit.

Retail relief
It's hard to believe that any retailer can prosper in the immediate future, considering how the economy has been taking a toll on retailers' sales. A whole slew of stores reported January comps yesterday, and many fell well below analyst expectations, for the worst monthly showing in five years. For the sector overall, sales at stores opened at least one year rose a skimpy 0.3%. Many individual retailers and department stores had worse results.

Yet even as Kohl's (NYSE: KSS) and Macy's (NYSE: M) reported dismal comps -- off 8.3% and 7.1%, respectively -- J.C. Penney beat forecasts of a greater than 6% drop, with a surprisingly more modest decline of just less than 2% for the month.

Nearly 700 investors at CAPS have opined on J.C. Penney, with 85% of them thinking it will outperform the market. CAPS investor lemoneater finds that the retailer's willingness to aim at a broad audience is what sets it apart:

JC Penney's is looking up. They have a nice fat catalog and a attractive website. Their clothing is of a good quality and reasonably priced. It is fun to walk through Penney's, but I find Sears depressing. I'm glad that somebody is willing to sell to the middle class!

Penney's transformation from a forgotten retailer to one that has nailed the online retailing game attracted CAPS investor dcrednek last summer. Although the shares have declined since then, the business fundamentals remain intact:

J.C. Penney, the quintessential department store, has been all but forgotten by most folks who prefer to consume higher up the foodchain. BUT here's a company that's not going away, that has the online sales game down as cold as Amazon, and a company whose fundamental performance warrants an 'outperform'.

Without question, the retailing environment is tough now. Even gift-card sales -- which many expected to extend the holiday shopping season into January -- came up short. Retail's slump will reverberate throughout the economy, from malls thriving on store expansion to commercial construction companies to newspapers that live by advertising dollars. Some retailers, however, may be able to not only survive but also thrive while competitors falter.

Shine your starlight
Will J.C. Penney be able to turn on a dime? Well, we haven't yet heard from you, and at Motley Fool CAPS, every investor's opinion counts. Your voice could determine whether these stocks become shooting stars or supernovas. Since it's free to sign up and post your thoughts, why not use this opportunity to take your star turn?