Analysts Are Completely Wrong About These Stocks

Although there will always be differences of opinion, these companies are some of the Motley Fool CAPS community's favorites. So why does the professional analyst community look down on them?

Below, we'll look closer at a handful of companies with the highest four- and five-star ratings from CAPS members, meaning you think they have the best chance of outperforming the market. Yet Wall Street still can't muster up enough opinions to agree.

So who's got it right? The professional class of analysts, sitting in their paneled offices, or a motley crew of community investors pooling their best thoughts for others to share? We have an idea about who we think will come out ahead: How about you?

Stock

CAPS Rating 
(out of 5)

Wall Street Bullish Sentiment

First Marblehead (NYSE: FMD  ) **** 40%
RADVISION (Nasdaq: RVSN  ) ***** 44%
The Phoenix Companies (NYSE: PNX  ) **** 43%

Source: Motley Fool CAPS.

As much as we love our CAPS community, don't invest in these companies just because they've garnered top honors. And don't sell just because Wall Street looks down on them, either. Investing requires closer study on your part, so use these ratings as a launching pad for your own research.

A ray of hope
I have to admit I have a hard time understanding the confidence the CAPS community has placed in private student loan provider First Marblehead. Ever since the financial markets imploded, the lender has been beset with losses, and while they were narrower than in the year-ago period, that didn't change in the latest quarter.

First Marblehead used to securitize private-label student loans for big banks like JPMorgan Chase (NYSE: JPM  ) and Bank of America (NYSE: BAC  ) , bundling them into trusts that resided off the company's balance sheet. It was a healthy business, representing almost 30% of revenue before the credit crisis hit. Then that all changed and First Marblehead now offers portfolio management and asset servicing. It has started originating private education loans again.

In July, new accounting rules went into effect that required First Marblehead to bring those trusts back onto its financial statements, and with billions of dollars worth of student loans now piled onto its balance sheet, First Marblehead reported a $708 million equity deficit.

The turnaround underway seems like it has a long way to go before gaining traction, yet 94% of the 2,780 CAPS members rating the company believe it will outperform the broad market averages. Add your voice on the First Marblehead CAPS page.

Dusting itself off
Analysts were obviously looking at the declining contribution Cisco (Nasdaq: CSCO  ) was going to make to RADVISION's top line and determined the video-conferencing specialist would falter. Cisco had accounted for 42% of RADVISION's revenues in 2009 (up from 39% the year before), but after it acquired rival Tandberg, even RADVISION said revenues would slump.

In the latest quarter they did fall, by 21% year over year, but that was not unexpected. What Wall Street didn't count on was RADVISION's ability to get its video business unit up to a pace that would offset a lot of the lost Cisco revenues. Sales in the VBU segment rose 32%, helping to turn the company into an end-to-end video solutions provider.

There are fewer than 140 CAPS members weighing in on RADVISION, so it's still flying under the radar of much of the investing community. Only you can decide if it's right for your portfolio, so add it to your watchlist and have all the Foolish news and analysis gathered for you in one place.

Construct an argument for growth
There's not much difference between the viatical business Life Partner Holdings (Nasdaq: LPHI  ) operates and the life settlement case The Phoenix Companies just lost. Both involve a consumer taking out a life insurance policy and then selling it to a third party for a usually discounted lump sum. The difference between them is how long the insured person has to live. Typically, if it's two years or less, it's considered a viatical; more than that and it's a life settlement.

In a legal case that had three sides, the State of New York recently ruled that life settlement policies are valid. The insured's wife said investors weren't entitled to the proceeds from the policy because they had no "insurable interest" in the insured. The investors said they were entitled to the proceeds they paid for. And The Phoenix Companies and the other insurance companies said they didn't have to pay out at all because the policies were illegal to begin with. The court ruled that an individual can take out a policy for whatever reason and the decision can't be second-guessed, thus validating the life settlement business.

Whatever setback The Phoenix Companies faced from the case, CAPS member WPThatcher still feels the insurer is a bargain.

This company is on the mend, but is still cheap. Selling for a 0.2 [price to book] and 0.13 [price to sales] in what I believe is a pretty undervalued sector. They've been steadily eliminating debt and cutting costs as part of a strategic shift. Third Point LLC reduced their position by 76% back in May, so there had been some pressure on the stock.

What's wrong with that?
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 tell us which side of the street will be the ultimate winner.

The Fool has written calls (bull call spread) on Cisco Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings. The Motley Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 19, 2010, at 4:07 PM, retrobeast wrote:

    Hi Motley Tool

    I was just wondering why do you waste our time with your useless articles?

    We all know that when you push a stock your are wanting people to load up so you and your fellow tools can sell.

    And vice versa.

  • Report this Comment On November 20, 2010, at 4:33 PM, fraudexposer wrote:

    In the Phoenix case the state of New York did not rule that life settlements are valid: That's a given. The court ruled that a person who is as sophisticated as the deceased, attorney Kramer, could game the system by acquiring life insurance he intended to sell--and that was valid. Therefore, his widow's claim to the proceeds was not valid--he knew what he was doing. And the insurer--the Phoenix Companies--cannot rescind the policy.

    Good for the court. The Phoenix Cos., (also listed on lawsuits as PHL) chose not to perform due diligence (i.e., thorough underwriting) when they issued life insurance policies with multimillion dollar death benefits to numerous people who immediately sold them to investors.

    Now PHL is involved in at least half a dozen (expensive) lawsuits, claiming they were defrauded, hoping the courts will allow them to rescind the policies.

    There are far too many of these in the Phoenix portfolio to consider the company was duped. They knew enough to be careful about STOLI (aka IOLA, SpinLife, etc.).

    And there are far too many of these to consider the Phoenix Companies to be a good buy.

  • Report this Comment On November 21, 2010, at 5:44 PM, MegaEurope wrote:

    "I have to admit I have a hard time understanding the confidence the CAPS community has placed in private student loan provider First Marblehead."

    I believe most CAPS bullishness comes from it being a TMF newsletter pick several years ago. Of course the newsletter was wildly wrong in this case (buying it above $20).

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