These Cold Stocks Are 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 has 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.

Company	CAPS Rating (out of 5)	Recent Price	EPS Estimates (this year-next year)
DryShips (Nasdaq: DRYS  )	***	$4.46	$1.03-$1.19
Veeco Instruments (Nasdaq: VECO  )	***	$32.28	$4.21-$5.19
Vical (Nasdaq: VICL  )	***	$3.21	($0.56)-($0.50)

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
The higher they've risen, the further they'll fall? Growth in China over the past few years was actually much stronger than previously believed. The government's National Bureau of Statistics revised rates for 2005 to 2008 upward by more than 1% annually.

The phenomenal advances in China's economy have fueled the rise of companies such as BHP Billiton and the shippers that transport the ores they've mined. Dry-bulk shippers DryShips, Diana Shipping (NYSE: DSX  ) , and Navios Maritime (NYSE: NM  ) built their empires on Chinese expansion.

But as far and as fast as China has come, it may be on the way back down. Factory output, retail sales, and investments slowed dramatically in the second quarter, while imports fell 23% from the year-ago period. Housing sales were down almost 20% from last year. While BHP will certainly feel the effects of slowing growth, the shippers supporting them will be affected as well, and just as they were starting to recover. It might be why investors are shorting DryShips.

Highly rated CAPS All-Star member metoo105 thinks there's more to the world than just China, such as Russia's need to import wheat in greater volumes in the aftermath of the wildfires that have wreaked havoc on its supplies:

Sector pick. Market for dry container ships is recovering. The price for this service certainly is volatile. $30k a day to $10k a day to $30k a day. Also the wheat that was to come to Europe from Russia is now a no go. That'll add significantly to the bottom line.

Smoking gun
Yesterday, we posited that analysts are being unduly pessimistic about Corning's (NYSE: GLW  ) ability to grow in the near term, because they're not appropriately assessing the impact of China's decision to eliminate its analog TV signal by 2015. This move will force consumers to purchase TVs able to handle the new digital signal, meaning Corning is likely to sell a lot of glass substrates.

That could be just the catalyst Veeco needs to overcome analyst reticence over its own opportunities for growth. While there may have been an inventory buildout of LCD TV backlighting, as at least one analyst has suggested, there's an undercurrent of forced migration demand that should support the company down the road.

But even if the TV business does slow, Veeco's LED equipment technology also has a home in solar and data storage (it's selling its microscopy and metrology instruments business). After last quarter's blowout earnings, it is anticipating revenues rising to $1 billion this year.

CAPS member ajm101 thinks Veeco got caught up in the Cree (Nasdaq: CREE  ) meltdown, but that there's still plenty of room to move up:

huge battleground stock, dropping because of CREE results. There are other manufacturers. Potential for short squeezze in the short term.

You can bank on it
Biopharmaceutical specialist Vical is focusing its attention on other areas that might have a longer-lasting impact on the company, now that the swine flu pandemic is a thing of the past. While its DNA technology may have allowed us to rapidly test, develop, and produce large quantities of a vaccine, it has prioritized its R&D efforts to concentrate on those areas where it can most quickly proceed to commercialization. For example, midstage trials for the experimental metastatic melanoma treatment Allovectin-7 have been positive. It's an area that Vical estimates has a worldwide market in excess of $500 million.

Even if swine flu turned out to be a pig in a poke, CAPS member hevElee likes Vical's development of vaccine techniques:

With many irons in the fire I like their prospects. I really like their emphasis on vaccine production and think that will pan out very well over the next few years. H1N1 may not have lived up to the hype, but it's only a matter of time before we have a pandemic that does. I think [Vical] is well positioned for such an event.

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.

Try any of our Foolish newsletter services free for 30 days.