5 Stocks Approaching Greatness

• Email
• Share
• Print

Some companies are obviously great investments -- in hindsight. 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
The data shows that stocks achieving five-star ratings on Motley Fool CAPS have outperformed the market by 12 percentage points and that newly minted five-star stocks represent your best opportunity to capture those returns. So let's sift through the proprietary ratings system and find those stocks heading toward superstardom. Here are a handful of four-star companies approaching greatness.

• Cliffs Natural Resources (NYSE: CLF)
• Harmonic (Nasdaq: HLIT)
• Amgen (Nasdaq: AMGN)
• Tesoro (NYSE: TSO)
• Walter Industries (NYSE: WLT)

Some of these names might surprise you. Amgen is a longtime pioneer among biotech companies. 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 120,000-plus CAPS members chose these companies as less obvious sources for tomorrow's great buys, so let's see why they might merit your attention.

In the presence of greatness
Executives still haven't gotten the memo on the evils of using margin to buy stock. Even after Chesapeake Energy's (NYSE: CHK) CEO Aubrey McClendon got the dreaded margin call, Tesoro CEO Bruce Smith had to sell 168,000 shares to cover a loan from Goldman Sachs. It's his second margin call, following a forced sale in October of 215,000 shares. If CAPS member illbcnul8r is right, Smith might very well miss out on his own company's recovery: "Another refiner who is going to blow expectations out of the water [because of] low crude prices."

The communications-equipment industry is finding markets extremely competitive these days, and video-services provider Harmonic is no exception. Industry consolidation hasn't made it easier for Harmonic, and with rivals such as Cisco's (Nasdaq: CSCO) Scientific-Atlanta division, it becomes more difficult to maneuver effectively. That didn't deter CAPS All-Star tenmiles, who said last month that equipment spending by the cable industry is likely to be more resilient than telecom spending.

Cable spending holding up better on relative basis than teleco's; video delivery play beaten up too much by the market -- grower with attractive metrics for new buyers around $6 -- 20% historical ROE with forward p/e roughly half. Strong balance sheet -- likely cheap here for patient longs unless they make a poor (i.e. non-accretive acquisition) in the next year.

And finally, at the end of October, MintCoin believed not only that coal was oversold but that Walter Industries itself was underestimated at a three-star rating.

Coal is oversold, demand isn't going anywhere but up long term. Adding the most beaten down in the sector. This one has some drawbacks (hence the 3 star rating) but I think it will rise with the sector.

Although the price of both Walter's stock and the Dow Jones Coal Index have continued to decline since then, the CAPS community seems to agree that the coal miner represents a great opportunity, since its star rating has begun its ascent.

A great opportunity for you
These four-star investments are on their way to five-star greatness, and it pays to start your own research on these stocks 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.

Sign up today for the completely free service, and let's us hear what you have to say about the great -- and almost great -- companies that interest you.