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 120,000-plus members, 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. Data suggests that CAPS' highest-rated stocks performed best while the lowest rated did worst. Let's look at companies previously rated at one or two stars that have recently enjoyed a bump in investor confidence and see whether the stars are really aligning in their favor.

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.

The sun's always shining somewhere
It's hard to see the downside here. While the specialty chemicals sector has had a rough go of it due to higher costs, particularly of oil -- 3M (NYSE:MMM) saw shares tumble by as much as a third this year -- Huntsman was able to narrow its losses as it increased its own prices. With crude prices now falling, profit margins should improve significantly. That makes it all the more surprising that the specialty chemicals maker is trading as low as it is, considering Hexion is on the hook to complete its merger with Huntsman -- at $28 a share! Now, granted, I doubt Huntsman shareholders will get that $28, since Hexion continues efforts to get out of the deal. But the courts have ruled in favor of Huntsman so far, which could foretell a much-needed inflow of capital for the company in the future. That was my rationale in marking it to outperform:

With Hexion ordered to complete the acquisition of Huntsman, it may not have the funds to do so because it is already highly leveraged. ...

If the deal goes through as planned, shareholders get $28 a stub. If Huntsman ends up getting most of Hexion, shareholders have a much more formidable specialty chemicals company.

It looks like a win-win scenario no matter what.

Even with the cutbacks that steelmakers have announced, CAPS member ZachGruver thinks that any return to normalcy in the global markets will benefit AK Steel: "Decent earnings and a stock buyback announcement are two recent positives in what seems to be an myriad of bad news for this stock. In the next couple of years as the global demand for commodities starts to return this stock should recover."

Top-rated CAPS All-Star zzlangerhans considers Cardiome significantly undervalued, given its strong cardiovascular therapy candidate:

Despite some obvious speed bumps, I think Cardiome remains significantly undervalued given the prospects for both IV and oral vernakalant. While the process is certainly frustrating for impatient investors, the eventual payoff is likely to be very high. I wouldn't be surprised if the share price is four or five times higher in two years, and there's no telling when in that two years the rise will occur. ... The bottom line is that the vernakalant data is good, the need for the drug is certainly there, and there's definitely potential for it to be a game changer in the emergency management of atrial fibrillation. I see Cardiome, Arena, and Ligand Pharmaceuticals (NASDAQ:LGND) as the most undervalued small cap biotechs in the current market.

Shine your starlight
Are these stocks driving ahead, or ready to crash? It pays to start your research on these and other investments on Motley Fool CAPS. Read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made, all from a stock's CAPS page. Then weigh in with your own thoughts on which stocks you think are 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?