5 Cold Stocks Heating Up

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 140,000-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.

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 too. 

Caution: Contents may be hot
A bitter chill has gripped the stock of financial and operational consultant Huron Consulting Group in the wake of irregularities in its M&A activities.

Highly rated CAPS All-Star member TSIF has good reason to say that the shenanigans remind him of the accounting scandal revealed earlier this year at Mahindra Satyam (NYSE:SAY):

... Huron was founded by two dozen executives from beriddled Arthur Anderson. Huron is under SEC investigation for practices done when acquiring several companies and there are multiple class action suits being filed. Additional money, (incentives), above the purchase price allegedly filtered back down to various individuals at Huron and the company acquired. Top management recently left (ousted CEO/CFO) and those behind held the quarterly report in an attempt to properly value the most recent quarter. 2005, 2006, 2007, 2008 may need to be restated.

It's a bit ironic that a company ostensibly charged with helping clients navigate the treacherous rules of accounting was itself charged with a bookkeeping scandal so vast that the entire management team was sacked, and the company found itself restating three years of results. It might be more than just coincidence that Huron was begun by escapees from Arthur Andersen, the accounting firm brought low by the Enron scandal.

Huron's audit committee discovered that shareholders of several companies Huron acquired had redistributed portions of their acquisition-related payments among themselves, and to some unnamed Huron employees.

In the ensuing month, Huron's shares have rallied 40%, and the company now sports a valuation of less than 10 times future earnings, just half of what Resources Connection (NASDAQ:RECN) trades at. But this isn't a company I'd be buying into just yet.

SEC investigations have been launched and the predictable class action lawsuits filed, and while Huron hasn't yet suffered any major client losses, a consulting firm's stock in trade is its reputation -- which for Huron at this point is shot. Clients may yet back away from renewing their contracts, as they might face pressure or lawsuits of their own if Huron isn't able to complete projects because of the scandal. Sure, a new management team was quickly brought into place, but how many new clients will it be attracting in the near term?

Part of Huron's scandal relates to how it accounted for goodwill, and as MajorLeagueFool points out, that ain't worth quite as much as it used to be:

Anybody look at the debt? $320 million. No assets, just goodwill, which has just become a liability. 3-6 months to decimal numbers.

Checking the mercury
Are these stocks invitingly warm or bitterly frosty? It pays to start your research 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 hot little numbers, and which offer cold comfort. It's free to sign up and post your thoughts.