5 Cold Stocks Heating Up

• Email
• Share
• Print

When a stock's share price is lower than a North Dakota thermometer in February, investors tend to give it the cold shoulder. But as the market warms to a stock's prospects, its price can heat up in a hurry. Alas, you can rarely tell that a stock is melting investors' hearts until after it's made that upward leap.

Taking the market's temperature
But Motley Fool CAPS' proprietary ratings, aggregated from the opinions and accuracy of 135,000-plus members, offer a great way to monitor investor sentiment. Following a CAPS rating trend can help us determine the best time to invest. Let's look at previously rated one- or two-star companies that have recently enjoyed a bump in investor confidence and see whether they're truly heating up -- or headed back to the deep freeze.

Company	CAPS Rating (Out of 5)	Recent Price	EPS Estimates (Next Year-Year After)
Cardionet (Nasdaq: BEAT)	***	$16.94	$0.67-$1.26
Ciena (Nasdaq: CIEN)	***	$10.00	($0.73)-($0.11)
MCG Capital (Nasdaq: MCGC)	***	$2.46	$0.62-$0.63
NPS Pharmaceuticals (Nasdaq: NPSP)	***	$4.50	($0.84)-($0.55)
Revlon (NYSE: REV)	***	$4.99	$0.50-$0.30

Source: Motley Fool CAPS.

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 pay attention, too. 

The sun's always shining somewhere
It's a good thing the market tends to be forward-looking, because if you look at the earnings trail that network specialist Ciena has left behind it, investors would be bidding the stock down, rather raising its shares by half, as they have over the past six months.

Ciena hasn't been able to sell the equipment necessary to offer those "triple play" offers for cable, voice, and data plans, with its customers -- including AT&T (NYSE: T) and Verizon (NYSE: VZ) -- busy cutting back on capital-spending projects. Even worse for the company is seeing its ability to generate free cash flow deteriorate, as the economy has plummeted. As my Foolish colleague Rich Smith noted, Ciena has traditionally done an excellent job at extracting true cash from its business, but it has struck out over the past three quarters, and now free cash flow has turned negative for the past half-year.

Management is counting on seeing business pick up again this quarter, though, and that optimism helped investors buoy the stock. Ciena needed the boost, after reporting a huge loss as it wiped its balance sheet clean of all goodwill. That means that even though Ciena's counting on its acquisition of World Wide Packets last year to deliver Ethernet services, Internet access, video conferencing, and VoIP, the value of that business is worth nothing, compared with what Ciena paid for it.

Ciena suspended its practice of offering revenue guidance in the first quarter, because of its limited visibility of what its customers were going to be spending. That concern probably should have been a clue that customers weren't spending anything -- revenue fell by 41% in the quarter. Management now says that although it's still peering into the fog, order flow has improved, and it should realize a sequential growth in sales. It still sounds as though things will come in well below 2008's levels, when revenue jumped by 24% year over year. Of course, that's better than a sequential decline, but let's not intimate that we're seeing green shoots here.

Yet when the economy does turn, and when AT&T, Verizon, Qwest, and Sprint start spending money again, you have to admire the position Ciena will be in. Highly rated CAPS All-Star member Hogty figures that as streaming video becomes an ever more important part of telecommunications, Ciena's role will be magnified in delivering it: "As the Television industry is shifted over to streaming online feeds, Ciena is the next global communications leader. A steal under 10, I'd still buy under 20."

The 150 companies that make up the Communications Equipment sector on CAPS have enjoyed some middling success over the past month. They've risen by 8%, compared with the S&P 500's 1% increase over the same period. Ciena, though, has fallen by more than 4%.

Crank up the A/C
So are these stocks driving ahead or ready to crash? It pays to start your research on these stocks at 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?