Although some investors pile into momentum stocks looking to ride the wave higher, others prefer to buy into those undervalued gems overlooked by Wall Street and Main Street. The former flash and crash when the momentum goes cold, while the latter have a better shot at delivering outsized gains over the long haul.
And the Motley Fool CAPS community knows a bargain when it sees one. Below you'll find two under-the-radar stocks that brim with promise. These companies have garnered 100 or fewer active recommendations on CAPS, but the community thinks they still have outsized potential.
CAPS Rating (out of 5)
No. of Active Picks
EPS Growth Last Year
Est. EPS Growth This Year
|Niska Storage Partners (NYSE: NKA )||****||78||8%||NC|
|American Capital Mortgage (Nasdaq: MTGE )||*****||31||NA||216%|
Source: Motley Fool CAPS. NC = not calculable; NA = not available.
Naturally, we want you to look a bit closer at these stocks before buying. Maybe investors are staying away from these stocks for a reason, so make sure there's nothing seriously wrong with the company before you plug it into your own portfolio.
In cold storage
Natural-gas futures succumbed to the fumes of an inventory report due today, as fear abounds that numbers will climb and prices further depress due to rising rig counts, warm weather, and a weak economy. Even though inventories are already at record highs, and prices at levels not seen in a decade, natural gas drillers continue to pump out more. Rig counts may be down 30% from their October peak, but the number of horizontal drilling rigs is up, and they're getting at reserves not traditionally available.
So, anyone even remotely related to the sector fell yesterday, as witnessed by Westport Innovations (Nasdaq: WPRT ) , a natural-gas engine maker and one that ought to be helped by cheap gas prices, which tumbled 6%. Even pipeline and storage facility operators El Paso Pipeline Partners (NYSE: EPB ) and ONEOK, another group that should benefit from an industry awash in gas, fell in line with the broad markets.
Yet not all did. Niska Storage Partners, a company I said last week would do well during an industry glut, bucked the trend and actually nudged its way into higher territory. Niska is the largest independent natural-gas storage owner and operator in North America and one of only two pure-play natural-gas storage master limited partnerships. Last quarter it missed earnings and warned that its dividend, which currently yields almost 15%, may be cut or suspended.
The risk is that perpetually depressed prices make the economics of storage untenable, because companies can't earn a premium on their facilities. Furthermore, with weak demand and inventories flush, facilities can't maximize the value of the spreads between prices in the summer and winter, when the gas is typically injected and withdrawn, respectively.
Yet with shares down by more than half from their highs, it seems most of the downside risk has been priced into the shares, and this is part of my rationale for rating it on CAPS to outperform the broad market averages.
Profiles in courage
Did we really need another mortgage REIT? The folks at business development company American Capital (Nasdaq: ACAS ) thought we did when they held an IPO for American Capital Mortgage last August at $20 a share. The market wasn't quite so sure, and its shares folded like a house of cards, but after its less-than-auspicious start the stock has recovered, soaring 57% from its lows.
ACM is a mixed mREIT, investing in both agency-backed and non-agency mortgages, as well as other mortgage-related investments. Yet this still isn't the right market for housing or mortgages. As a Reuters article related just yesterday, the next wave in the foreclosure tsunami will be breaking on our shores soon, and some analysts see this year being even worse than 2010.
Online realty site Zillow expects that a new surge in foreclosures this year will depress housing prices another 4% (Morgan Stanley estimates they'll fall as much as 11%), but they won't hit bottom until next year and will then stay in a trough for another three years. With 9 million homes in the foreclosure pipeline that will need to be cleared before there's any recovery, I'm guessing it's going to get a lot worse and last a lot longer than the pros are anticipating. Particularly with politicians trying to kick the can farther and farther down the road, the housing market's not one I'd want to be in today.
Although CAPS All-Star matstao and others salivate over ACM's 16.8% dividend yield, and there's unanimity among Wall Street and Main Street that it will outperform the market, I'm going to be the first to weigh in on CAPS and say it will underperform going forward.
Add American Capital Mortgage to your watchlist and let us know in the comments section below whether the wave of coming foreclosures will wash away its dividend.
Keep a high profile
Although there are equally persuasive arguments for swearing off these promising stocks, you need to look beneath the headlines and press releases to get a fuller picture of where your money is going.
Looking where others ain't is how The Motley Fool uncovered two small-cap stocks with solid government deals that are ready to deliver multibagger returns. Check out The Motley Fool's free report, "Too Small to Fail: 2 Small Caps the Government Won't Let Go Broke." Get access to detailed analysis of these two companies -- it's completely free.