Unloved Stocks Ready to Shine

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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 105,000-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 two-star-rated companies that have recently enjoyed a bump to three-star status, and see whether the stars are really aligning in their favor.

Company	CAPS Rating (out of 5 max)	Recent Price	Est. FY08 EPS Growth
Investools (Nasdaq: SWIM)	***	$8.25	88%
National Semiconductor (NYSE: NSM)	***	$20.72	5%
S1 (Nasdaq: SONE)	***	$6.49	22%
Sycamore Networks (Nasdaq: SCMR)	***	$3.28	22%

Source: Motley Fool CAPS, Yahoo! Finance.

Obviously, this is not a list of stocks to buy -- just a starting point for further research. Yet if some of the best investing minds are taking notice of these stocks, maybe we should, too.

Still rolling on
On one hand, Investools is a competitor to the Motley Fool. About half of its business is directed toward investor education, while the brokerage firm representing the other half competes against some Motley Fool Stock Advisor-recommended stocks, including optionsXpress (Nasdaq: OXPS) and Charles Schwab (Nasdaq: SCHW). Investools presents an interesting value proposition: Teach customers how to invest, then give them the tools to do so.

On the education side, Investools (soon to change its name to Thinkorswim Group, after the name of its products and courses) lures investors with free offerings, hoping to convert them to paying customers for its various seminars, which cost more than $999 each. For many investors, that smacks of hucksterism, and reminds them too much of dubious stock promoters. Wade Cook was one such seminar-running financial guru eventually brought down for misleading investors.

Top-rated CAPS All-Star Lance912 disparages all such promoters, noting they all chase the same dwindling supply of investors:

Too many of these ripoff joints out there now. There are only so many people that can be fleeced, and you can only skin a sucker once in this business.

With so many outrageously pricey "investor education" sites available, such as Teach Me To Trade (which astonishingly the Fool accepts ad money from), Better Trades, Optionetics, etc., they will all be chasing after a dwindling group of suckers. Their Alexa rank shows decreasing Internet traffic, which we have to expect means decreasing profits. This plus the power of Google (just typing in investools yields tons of complaints) means it will be more difficult for this company to make profits in the future.

Nor does it help that the SEC has launched an "informal probe" of some of Investools' investment-seminar practices. Investools' shares were sliced by more than a third following reports that regulators were investigating representations made by some of their seminar leaders.

Perhaps Investools's recent plan to cut one seminar's cost from $1000 to $299 suggests a growing difficulty in finding customers. However, the brokerage side of the business can continue to fuel future growth; in its latest quarter, revenue quadrupled to $42.5 million, even as the education business rose at a more modest 8% year over year. Brokerage services now account for nearly half of Investools' revenues.

CAPS investor aureo11 realizes that the SEC probe might weigh on operations for a while, but feels the brokerage business will remain strong:

I might be somewhat early with this pick as the recent SEC probe might still send the shares lower. However I do think that the brokerage half of the business is solid and will help pick the stock back up.

Shine your starlight
Is Investools ready to sink or swim? 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?