Momentum investors love to back companies with the wind in their sails. Contrarian investors typically pick up the cigar butts the market has tossed aside. So what do you call investors who turn against winners? Sourpusses? Shorts?
Over on Motley Fool CAPS, we sometimes call them the savviest investors around. When one of our All-Star players -- those whose stock-picking prowess places them in at least the 80th percentile of our community -- sours on a top-rated stock, perhaps we should take notice. Perhaps the player's found a chink in that highflier's armor, or a question mark in its financial footnotes. Or maybe it's just a hunch. That's why these tables aren't lists of stocks to buy or sell -- just starting points for further research.
Here's a list of stocks that some All-Stars have recently spurned:
On average, 96% of all the investors rating these companies think they will outperform the market. What might have turned some of CAPS' top players against these otherwise widely admired companies?
A wrinkle in the thesis
Aesthetic lasers have been around long enough that, were the industry as vibrant as it's been portrayed, a dominant player would have emerged by now. Instead, we seem to be faced with a muddle of small companies that offer essentially undifferentiated products. Most of the lasers remove wrinkles and tattoos, zap varicose veins, eliminate age spots, and melt away cellulite. As a result, there is no consistent message being delivered to the consumer. In fact, the laser companies themselves usually aren't even in the business of educating the consumer at all, focusing instead on the doctors to whom they sell their equipment.
Despite a declining share price, Cynosure has been growing revenue and earnings over the past year. That could explain why there haven't been any meaty underperform pitches, even though a baker's dozen CAPS investors have marked the company to underperform the market, particularly recently.
Instead, bullish arguments have been getting all the attention. For instance, there's All-Star Braho's note from November highlighting the industry's demographics and Cynosure's ability to introduce new products, leading to an attractive valuation: "New products are driving accelerating sales and EPS growth in an emerging field with huge demographic forces driving demand. ... 2008 estimates of 26% make the current valuation reasonable." However, unless there's industry consolidation, I'm not convinced that one company will be able to rise above the pack.
Nonetheless, if there is one that could emerge, I think it would be Palomar Medical Technologies (Nasdaq: PMTI ) , a company that has successfully defended its patents against Cynosure and others. Collecting royalties from others' laser sales ought to provide it with a revenue stream unavailable to the competition. However, a tough fight with Candela (Nasdaq: CLZR ) , a company I once mistakenly thought had the power to lead the industry, could continue to drain its resources in the near term.
Make lemonade from lemons
We've seen the direction some investors have indicated they believe these companies are heading, but Motley Fool CAPS is more than what the pros think, even if they're All-Stars. It's where we invite you to share your thoughts and insights and add your voice to the debate. Go ahead, have your say. We're eagerly waiting!
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