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 165,000-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.
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Company
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CAPS Rating (out of 5)
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Recent Price
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EPS Estimates (This Year-Next Year)
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Bank of Montreal (NYSE: BMO )
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***
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$59.83
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$4.62-$5.50
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Federal Agricultural Mortgage (NYSE: AGM )
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***
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$14.53
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N/A-N/A
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Nalco Holding (NYSE: NLC )
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***
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$22.06
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$1.41-$1.70
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Source: Motley Fool CAPS; N/A = not available.
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
Our neighbors to the north have been skipping along merrily throughout the economic crisis, with economic growth of 5.5% expected for the first quarter, according to the OECD. Bank of Montreal reflects that mood, with BusinessWeek recently pointing out it's been the best performing Canadian bank stock this year. It's been acquiring accounts here in the U.S., though net income from its operations here fell 43%, and BMO finds its exposure to the European economic crisis to be "modest" at worst.
Of course, sometimes with success comes complacency, and BMO, along with Royal Bank of Canada (NYSE: RY ) , is accused of getting lax with lending standards for providing financing on a property used for a massive marijuana-growing operation. While such occurrences are often aberrations, the U.S. housing market bubble was a testament to how bankers could look the other way when it came time to generate revenues.
Still, provisions for loan losses continued to shrink for BMO in the latest quarter, falling by a third from the year-ago period. CAPS member oyster2386 thinks Bank of Montreal is a more stable, dependable financial institution than you'll find elsewhere in the world:
Their current acquisitions in the US as well future ones and the same at home are their future growth. Excellent management, a very low exposure to bad loans and a strong operating plan towards business lending make them my first choice after running all the numbers. Even our god cramer likes them. so that makes them a guaranteed winner.
A real stem-winder
Think all those financial bailouts we endured were expensive? The bill could get worse. According to a Bloomberg report, Fannie Mae (NYSE: FNM ) and Freddie Mac (NYSE: FRE ) could end up costing U.S. taxpayers as much as $1 trillion by the time we're done "fixing" them. All those "liar loans" and creative financings that Canadian banks seems to have sidestepped for the most part are part and parcel of the $10.7 trillion in nationwide residential mortgages.
Federal Agricultural Mortgage, also known as Farmer Mac, isn't in such dire circumstances as its government-owned brethren. Its 90-day delinquencies rose 42% since December, though they're down somewhat from the year ago period. However, most of those delinquencies were centered in the beleaguered ethanol industry, in which Farmer Mac reduced its concentration.
CAPS member Smalls62 isn't alone in believing that the agency will bounce back, as it diversifies away from investing in farmland alone:
What do you see happening with the electrical grid, wind and solar farms? Major upgrades and expansion. [Federal Agricultural Mortgage] can loan on any cooperative electric so those types of projects are not the limits. Do you need a bigger neon sign? American Power Act will make development in these sectors even bigger if passed. Lumping this GSE with FNM/FRE is a major mistake.
Not so threadbare
Until two months ago, you probably had little reason to be aware of Nalco Holding. However, after the BP (NYSE: BP ) oil spill, its dispersants have come front and center. So far, BP has used more than 850,000 gallons of underwater and aerial dispersants to try and break up the crude polluting the Gulf of Mexico. Environmentalists charge that Nalco's Corexit could harm marine life, and some suggest the dispersants are leading to the massive plumes of oil scientists have discovered beneath the ocean's surface. Nalco maintains that its dispersants are safe; while they're typically used at the scene of an oil spill, there's never been a mess as massive as what BP has wrought.
Considering the volumes of dispersant BP is using, there's little wonder that investors see opportunity here. CAPS member noirblood expects a major jump in revenues to result: "Nalco said it will likely have generated about $40 million by the end of this week from the sale of dispersants following the BP oil spill."
Checking the mercury
Are these stocks invitingly warm, or bitterly frosty? It pays to start your 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. 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.
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