These Cold Stocks Are Heating Up

When a stock's share price is lower than the mercury in 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 move up.

Taking the market's temperature
But Motley Fool CAPS' proprietary ratings, aggregated from the opinions and accuracy of 170,000-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 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
We continue to hear a lot about network storage, and with both QLogic and Emulex beating analyst earnings expectations Thursday, we're likely to hear more. Seagate Technology (NYSE: STX) in particular has come onto everyone's radar because of takeover rumblings, but its earnings actually came in below what Wall Street was anticipating. While the industry is doing better, it's not an even process.

Emulex reported non-GAAP earnings of $9.9 million, or $0.12 per share, for its first quarter. That was a good sight better than the $0.09 analysts had forecast, but its GAAP earnings were sunk because of stock-based compensation that ate up $0.18 per share of the company's profits. Are investors supposed to be happy about how well-compensated management is?

Sure, Emulex's sales have markedly improved, and the acquisition of ServerEngines was completed, which ought to help grow its host server products segment. But that's a huge chunk of shareholder change to transfer over to management.

Emulex remains a bullish choice among CAPS members, however, with 85% of those rating the company picking it to outperform the broad market averages. Let us know what you think about the stock options compensation paid to management on the Emulex CAPS page.

A clear road ahead
Corporate debt investment companies like Apollo Investment (Nasdaq: AINV) and KKR Financial have also drawn more attention, particularly as the easing of the financial crisis and improvements in the economy have improved their prospects. Analysts think KKR Financial in particular should enjoy stronger investment gains because of its focus on collateralized loan obligations.

Shares of KKR Financial are up 60% since the beginning of the year, and CAPS All-Star mrindependent says the economic and financial landscape is perfect for the firm.

KKR Financial Holdings ought to benefit from the super favorable yield curve and the super favorable spread between lower risk securities and higher risk securities/loans. Qualifies for my 12 best low price value stocks screen, which outperforms most in up markets. I am bullish. Selling for 5 [times] forward earnings. Awesome dividend yield.

Only you can decide whether KKR Financial is right for your portfolio, so add it to your My Watchlist page and have all the Foolish news and analysis about this stock gathered in one place.

Golden globes
Chinese waste-water treatment stocks are also warming up. While RINO International (Nasdaq: RINO) and Duoyuan Global Water (NYSE: DGW) are somewhat larger, Tri-Tech Holding is holding its own in the space. It has won contracts with Sinopec and the government to build treatment facilities, the latter of which is expected to generate $32 million in revenues over the life of the project.

A number of Chinese small-cap stocks are causing investor consternation because of questions about their finances, but that doesn't mean all or even most are fraudulent operations. Investors ignore the solid ones at their own financial peril.

All-Star TrekRider59 writes that Tri-Tech will be able to capitalize on the very real issues China has with its water systems.

TRIT just won a joint bid for a water treatment plant in Inner Mongolia. They're holding an 80% stake and they expect to complete the project in late 2011. This project alone should add $32 million to their revenues. Let me reacquaint you with the revs from above so the significance of this is not lost to you...

Only a few dozen CAPS members are aware of Tri-Tech, but more than 90% of those rating it believe it will beat the market. Head over to the Tri-Tech Holding CAPS page and let us know what you think about this Chinese small cap.

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, and which ones offer cold comfort. It's free to sign up.