Some companies are obviously great investments -- in hindsight. Sure, we should have bought Starbucks at its IPO and earned hundreds of percent return 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, you can find these opportunities 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. Their five-star peers usually get all of the attention, so let's sift through CAPS to find some four-star companies approaching greatness:
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Ares Capital
(NASDAQ:ARCC) -
Brocade Communications
(NASDAQ:BRCD) -
Cisco
(NASDAQ:CSCO) -
OM Group
(NYSE:OMG) -
Vision Sciences
(NASDAQ:VSCI)
Some of these names might surprise you. Cisco, for example, has been providing the backbone of the Internet for decades. Yes, 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.
A failure to communicate
In many ways, Brocade Communications became the poster child for the excesses of the backdating scandals that erupted a few years ago. Not only has the company agreed to pay a $160 million fine to settle all of the remaining charges against it, but its former CEO and other executives have also received prison sentences for their roles.
Brocade also became the whipping boy for those excesses. Taken as a whole, prosecution of and punishment for these crimes has been uneven. While some 17 corporate executives overall have been criminally charged in similar scandals, others have escaped the equivalent of the executive gallows. Steve Jobs essentially admitted his personal role in backdating options at Apple
Meanwhile, the options issue has continued to be a distraction for Brocade. Perhaps with the matter drawing to a close, the company's position as a leading player in the network-storage business will allow it to focus on future growth. It faces some challenges from the weak U.S. economy in the short term, as product revenue, which makes up 83% of Brocade's total revenue, slipped in the latest quarter. Its outlook for the third quarter seems just about in line with expectations, although analysts seemed to want better.
Some investors agree that Brocade has been distracted from its mission but that its stock has also suffered from concerns over competition with Cisco. Here's an excerpt from a January pitch by CAPS player mxhughes:
This company has suffered from the stock option fiasco ... [but] it is as though they were chosen to be made an example of, because they certainly are no more guilty than dozens if not hundreds of other tech companies. The other issue has been the fear of Cisco who entered their space six years ago. However I have appreciated the fact that through all of this they seem to have kept their noses to the grind stone and have been fiscally wise and stayed focused on execution of every part of the business.
Others believe that Brocade's business is such that it can survive even a slowdown in IT spending among businesses, since IT is ultimately essential. Says CAPS player GreyRanger: "[Brocade] is in computer storage, which is a … strong [subfield] even in a corporate tech slowdown. More and more information is required to be retained and [storage area networks are] an optimal way of doing it."
A great opportunity for you
You've heard directly from CAPS players about Brocade, but do you agree? Is this, or any, four-star stock still investment-grade material? On Motley Fool CAPS, you can give your input, which ultimately influences how the stocks get rated. Outperform or underperform, near-term or well in the future -- whatever you judge, your opinion counts.
Sign up today for Motley Fool CAPS -- it is completely free. Let's hear what you have to say about the great and almost great companies that interest you.
