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
On Motley Fool CAPS, these opportunities can be found among our four-star stocks. In CAPS' proprietary ratings system, they rank higher than most of the other 5,400 starred companies, but they're just shy of superstardom. While all the attention might be focused on their five-star peers, we can sift through CAPS to find four-star firms approaching greatness. Here are a handful of four-star firms approaching greatness.
- American Capital (Nasdaq: ACAS )
- Chimera Investment (NYSE: CIM )
- E*Trade Financial (Nasdaq: ETFC )
- Taseko Mines (NYSE: TGB )
- Windstream (NYSE: WIN )
Some of these names might surprise you. For example, discount broker E*Trade Financial flirted with bankruptcy in the aftermath of the housing meltdown as its mortgage bets went south with the market. Almost great? Even familiar names can still offer some of the best opportunities. Perhaps we've just forgotten the potential they still hold.
Rural telecom carriers like Windstream, CenturyLink, and Frontier Communications have investors burning up the phone lines talking about their juicy dividends, but price competition is fierce, and those dividends might not be sustainable. However, the 165,000-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 sight of greatness?
No doubt American Capital is a speculative play that got absolutely hammered in the financial market meltdown. The potential for a second serving of a recession has management scrambling to get its house in order, yet that's what makes this investment intriguing.
Providing middle market businesses with capital during a period when banks just aren't lending makes its outlook exciting. American Capital takes equity positions rather than just loaning money, giving it a payoff when it eventually exits from the business. Yet the recession made it hard to sell its portfolio, and having leveraged itself more than rivals Apollo Investment (Nasdaq: AINV ) and Ares Capital, AmCap ended up defaulting on its revolving line of credit, bonds, and privately placed notes last year. That's why a double-dip on the economy is nerve rattling.
But between that default and now, the business development company has sold off assets, restructured its $2.4 billion debt load reducing it by about half, and its auditor has removed the "going concern" notice from its financial statements. The ratings agencies cut American Capital's debt ratings as a result of the restructuring, even though it puts the company on firmer footing. CAPS lbtbernstein says rather than making it more risky, AmCap is a better investment now because of it:
Refinance has been completed and [American Capital] looks more likely to make exits from existing portfolio. As finances improve look for this to trade over book value.
On the shoulders of giants
While those rural telecoms are attracting investors because of their yields, REITs remain the king of yield still, and Chimera Investment currently exceeds 17%. Yet REITs offset that by taking on lots of leverage, though Chimera hedges that through interest rate risk and credit risk strategies. Of course, mortgage investments these days seem inordinately risky, and the double-dip scenario worrying American Capital has to cause Chimera executives to quake, too. All the signs point to a new slowdown in the housing market.
However, Chimera hasn't sat around waiting for the market to determine how it reacts. As CAPS member OmegaSD, the REIT has taken the initiative to put itself in a much better position:
The worst mortgages are coming off lenders' books in the next year or so, and [Chimera] just raised capital to invest in newer, more tightly underwritten mortgages. The housing market has pretty much bottomed out (according to Moody's), and while the climb will be slow over the next few years, it's mainly going up.
A big opportunity
The market sold off Taseko Mines shares after a provincial advisory panel said there were several "significant adverse effects" from the miner's bid to acquire a stake in the Prosperity mine in British Columbia.
Thank you, Mr. Market, for the wonderful entry point. In reality, while there were 24 potential environmental impacts found, all but two were deemed insignificant. Of those that remained, Taseko has already proposed a remedy (making a new fish lake) for one while the other addresses human activity on grizzly bears. The mine itself has no impact on the bears, and with the economic benefits to come from the project -- the panel wasn't tasked with considering that aspect -- Taseko believes the government will ultimately sign off on Prosperity.
Taseko's stock has already bounced 28% off the lows it hit after the news, confirming CAPS member pabloplato's suspicion the sell-off was overdone. Yet as it still sits 30% below recent highs, there's plenty of opportunity to become prosperous yourself.
Mine the opinions of other CAPS members on the Taseko Mines CAPS page and let us know your position on the prospects for Prosperity.
A great opportunity for you
Investor sentiment suggests these four-star investments still seem to be on their way to five-star greatness, but 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 us hear what you have to say about the great and almost-great companies that interest you.