5 Stocks Approaching Greatness

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Some companies are obviously great investments -- in hindsight. Sure, we should have bought Starbucks at its IPO and earned hundreds of percent 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 5,600 stocks in the CAPS universe, but they're just shy of superstardom. All the attention might be focused on their five-star peers, but we can sift through CAPS and find four-star companies approaching greatness. Perhaps in:

• General Steel (NYSE: GSI)
• MRV Communications (Nasdaq: MRVC)
• Ramtron International (Nasdaq: RMTR)
• Agnico-Eagle Mines  (NYSE: AEM)
• H.J. Heinz (NYSE: HNZ)

Some of these names might surprise you. Heinz, for example, has given us 57 ways to keep us in a state of anticipation for decades. Almost great? Even familiar names can still offer some of the best opportunities. Perhaps we've just forgotten the potential they still hold. However, the 105,000-plus CAPS investors chose these companies as less obvious sources for tomorrow's great buys, so let's see why they might merit your attention.

Adding fiber to your diet
While MRV Communications is often viewed as a play on fiber optics -- and a poor one in comparison to rivals like Alcatel-Lucent (NYSE: ALU), which is both a competitor and distributor of its products -- it brings in a larger amount of money from network integration services to Tier One carriers in Europe. This remains MRV's primary line of business and is its most profitable line of work. For 2007, network integration was also the only segment reporting an operating profit. As a whole, the company has not reported positive net income since 1997.

It's been difficult for MRV Communications. For the first quarter of 2008, it achieved growth in network integration services only through favorable currency exchange rates. Its July 2007 acquisition of Fiberxon was the primary reason it saw a revenue increase in its optics division in Q1. Without those factors MRV's growth would have been, at best, flat.

Why would it be a potentially great investment? After the Fiberxon acquisition, it planned to spin off the optics segment of its business into a new company, Source Photonics. It filed the IPO registration last December. By having its operations based in China, MRV figures the new company will be a low-cost way to capitalize on the growth of the fiber-to-the-home network, and piggyback on the success of Verizon's (NYSE: VZ) FIOS expansion. 

For example, according to the analysts at LightCounting, reported by Source Photonics, the market for passive optical network terminals for customers' homes, part of what the company would sell, is expected to grow at a 30% compounded annual rate between 2006 and 2010. Analysts view the sum of MRV's parts as greater than its current valuation, and the spinoff represents an opportunity to unlock that value.

Investors like CAPS player SmallCapKing noted last summer that the spinoff, even if it doesn't happen for a while, is a good reason to hold onto MRV.

Too much intrinsic value and bad news priced in at $2.60 today. STRONG BUY, worth sitting on even if the [imminent] spinoff does not happen until Summer 08. Stock will easily double at that point based on fundamental value and sales.

Last month top-rated All-Star investor ResearchLover felt that MRV had stopped the bleeding of its cash and that when it is able to post a good growth quarter, the market will assign it an appropriate valuation.

Revenue growth looks sufficient to finally stem the constant cash burning. The next statement that shows growth should assign the company a PE and make it attractive to institutional investors. The 2 top insiders each bought 20k shares at the same price as today's open (1.49).

A great opportunity for you
You've heard directly from CAPS on MRV Communications, but do you agree? Are these four-star stocks still investment-grade material? On Motley Fool CAPS, you can give your input and 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 is completely free. Let us hear what you have to say about the great and almost great companies that interest you.