3 Stocks Approaching Greatness

For every stock out there screaming, "buy me," others simply give us a nudge and a nod. While all the attention might be focused on their five-star peers, we can sift through Motley Fool CAPS to find four-star stocks giving us the "high sign" they're approaching greatness. 

These opportunities -- including familiar names and beaten-down companies -- rank higher than most of the other 5,400 starred companies, and it pays to investigate their potential. For consideration today I've got this handful of stocks on their way to fame.

  • DragonWave (Nasdaq: DRWI  )
  • Level 3 Communications (NYSE: LVLT  )
  • MIPS Technologies (Nasdaq: MIPS  )

As the 180,000-plus CAPS members have chosen these companies as less obvious sources for tomorrow's great buys, let's see why they might merit your attention.

In the sight of greatness
The market hasn't been kind to microwave backhaul provider DragonWave, cutting its stock by more than two-thirds from the 52-week high it hit back in April as the opportunity for its biggest customer, Clearwire, faded. Although it was branching away from the WiMax technology specialist, Clearwire still accounted for 60% of its total revenues (down from 80% the year before), so when Sprint (NYSE: S  ) chose to virtually abandon WiMax for LTE technology, it was bound to impact DragonWave.

It's hard for me to get excited by DragonWave's prospects right now. While it continues to search for new customers, it's pursuing a growth by acquisition strategy -- which itself is fraught with risk -- and has been buying back stock; all the while revenues are falling and it doesn't see itself turning profitable until 2013.

The bright spot, though, is the chance for its deal with FiberTower, the largest wholesale backhaul provider in the U.S. Analysts anticipate FiberTower spending as much as three-quarters of its future backhaul spending on microwave technology, rather than fiber.

But 96% of the CAPS members rating DragonWave are confident in the turnaround prospects and have marked it to beat Wall Street going forward. Share your thoughts on the DragonWave CAPS page if you think the microwave backhaul specialist won't get burned, then put it on your watchlist to keep track of its progress.

Content yourself with this one
Not everyone thinks the merger of Level 3 Communications and Global Crossing will result in a company that's able to turn the content delivery provider into a profitable venture. Certainly neither has proven itself capable of being profitable as a separate entity, so why should synergies materialize by bringing them together? Sears Holding should be enough of an example of joining two losing operations, as Kmart and Sears have never melded properly.

Yet the proliferation of mobile computing through smartphones and tablets points to the need to provide as big a pipeline as possible, and that underscores the growth catalyst present for Level 3. Content may be king, but without the bandwidth to deliver that content, you've got nothing. The risk, though, is the pricing pressure for Level 3 from fierce competitors like Akamai (Nasdaq: AKAM  ) and Limelight Networks.

Count CAPS member Raztick among the doubters, believing as he does that it will continue to struggle to right itself for some time to come, but Notnowhomer says Level 3 has the wherewithal to exceed expectations: "Despite themselves the asset is gold and has a lot of capacity to increase its bandwidth it needed. I also think company could be purchased in the near future for this capacity."

Tell us in the comments section below or on the Level 3 Communications CAPS page whether it can cross the chasm to profitability, and add it to your watchlist to see its progress.

Activists acting up
I'm sure it's nothing management at MIPS Technologies has done to warrant the greater CAPS support for the company, considering it has produced a string of disappointments that featured the CEO overpromising and underdelivering. I've noted previously that I was done with management's inability to deal straight with shareholders, and apparently I'm not the only one.

The chip designer received a letter from one of its largest shareholders, Starboard, that revealed a significant lack of satisfaction with the current board of directors and offered a slate of candidates to be nominated. Starboard says management and the directors have had their hands on the tiller of value destruction since its IPO and it was time to steer a new course.

Now it's true the industry has been reeling in the current economy with both Broadcom (Nasdaq: BRCM  ) and Entropic Communications (Nasdaq: ENTR  ) putting up disappointing numbers alongside MIPS, but Starboard says MIPS has focused on the wrong things and should stop buying companies and instead buy back its cheap stock.

If a big shareholder is willing to go on record wanting to shake things up, it's not surprising CAPS members are willing to tag along with a company that has a lot of promise. TheBlindCat points to international opportunities as one avenue to pursue: "This stock is so beaten down that, despite being a huge fan of ARM, willing to take a flyer. Cash on hand looks good, expansion in the Chinese market has been touted by some and IP has value in the current litigious environment."

Join Starboard by giving us your thoughts on the MIPS Technologies CAPS page on what it should do to change course, then add the stock to the Fool's free portfolio tracker to see if it follows through.

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.

Fool contributor Rich Duprey holds no position in any company mentioned. Click here to see his holdings and a short bio. 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. The Motley Fool has a disclosure policy.


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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 October 26, 2011, at 1:52 AM, jopow wrote:

    Regarding DragonWave, for the sake of accurracy, they only did an acquisition in October 2010. They may or may not acquire another company based on recent CEO comments, and it would be only if there is some extremely advantageous benefit. As for the buy back, that was done in the summer of 2010 and was stopped. I do not believe they ever exhausted the buy back and stopped it as the stock stabilized last year summer. Currently, DragonWave announced that if conditions required it, they will go into cash conservation mode effective March 1, where earnings will equal expenses for a zero or neutral earnings report, rather than the small losses reported in recent quarters. They do have a reliable flow of steady business, but, they have been involved in trying to establish new major accounts around the world, for the sake of trying to grow revenue and profits. The company does have many opportunities to become profitable next year, and many experts and analysts see those opportunities as very solid. Just today, DragonWave announced a key and strong new product in microcell systems for dense population centers where there are jammed up mobile communications. They announced a partnership with Fibertower for this new microcell solution. But this new product line will be promoted to everywhere in the world where there are overloaded mobile networks in densely heavy traffic areas. This new product is top of class and has very desirable specifications and reasonable price ranges to the customers. This new line will be additional revenue beyond what has been projected and guided. Therefore, the turn around story is actually more compelling. The current price of DragonWave is about $3, from the IPO in 2009 about $7. There was a prior high of $14 after the IPO. The $3 culminated after the Clearwire project stopped, but, that company may eventually be funded and order more DragonWave products. That cannot be ruled out. That would greatly change guidance should Clearwire receive new funds to grow its network. Also, Sprint is now ordering new equipment for its LTE network, and DragonWave is supplying to Sprint. So, all things considered, the $3 present day share price can fairly easily reach $4-5 once the turn around occurs. That is a high percentage gain to any investor now buying into the company.

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