Unloved Stocks Ready to Shine

Investor sentiment can be a powerful force on Wall Street. Think of it as a pendulum swinging in a company's favor. When investors begin to think highly of your company, it might be a sign that the stock will also start heading in the right direction.

Yet knowing when investors are beginning to warm up to a stock isn't always easy. Often, you can only tell after the stock has moved up -- but by then, it may be too late.

An astrolabe for investors
Investors at Motley Fool CAPS, however, have a way to monitor the progress of investor sentiment. Like every player on CAPS, each stock is given a rating from one to five stars, with five being the best. While the full "secret sauce" of how the ratings are calculated is proprietary, there are three factors that influence a stock's star rating:

• Whether a stock is rated "outperform" or "underperform"
• The length of time it is expected to take to achieve this performance (a few months or a few years)
• The ratings of the investors who make the picks

Like astronomers scanning the skies, investors can then track the movement of the stars. A stock's CAPS rating trend shows how investors feel about the stock over time, whether its star rating is on the upswing or trending down.

Investors can then use this information to help decide whether it may be a good time to invest in the stock. Here we're looking at companies with the lowest ratings -- one and two stars -- that have seen investor confidence upgraded one notch higher. Below is a table listing some of the stocks that have seen the stars start to align for them.

Obviously, this is not a list of stocks to buy -- just a starting point for further research. Yet consider supercomputer maker Cray, which has been a low-rated stock in CAPS for a while now, stuck at two stars.

In mid-September, when the market briefly bid the stock up, CAPS investors seemed to know something different, because Cray's rating fell to one star. That was prescient; on Oct. 1, Cray peaked, and its shares have tumbled since. Yet CAPS is starting to look more favorably on the company, which was once synonymous with the biggest, fastest computers, as its CAPS rating has ticked up again. Could this portend another prescient call?

Hot fun in the summertime
When people think of alternative energy, they don't necessarily consider it "fun." Yet the curiously named Solarfun has been just that for investors, particularly over the past couple of weeks, after privately held renewable-energy investor Good Energies announced that it will increase its stake to nearly 35% of the company. The solar outfit from north of the border, Canadian Solar, has also done very well over the past year. Alt-energy companies seem to be enjoying their time in the sun.

Since its founding in China in 2004, Solarfun has seen its revenue rapidly increase, thanks to higher sales and the ability to raise prices with the greater demand. That didn't help the company when it missed earnings earlier this summer, driving its share price downward. But CAPS All-Star Firesale saw opportunity there, considering the high price of oil:

The bad, missed earnings and fell below it's $13 IPO price; and the good, revenue growth 207% and EPS growth 225%. Take the good with the bad and gain the potential to double your money as oil prices head north.

New CAPS player cheesebits agrees that higher fuel prices will spur increased investment in alternative energy. That's why the Good Energies investment is significant; you have an "insider" buying a considerable portion of the company when it's looking cheap:

Solar sector is a hot sector and will continue to be hot for awhile due to our and the world energy demand. As oil continues to be depleted, oil and gasoline prices will continue to rise, and clean alternative energy will have to be explored, developed, and competitively brought to fill the world energy's needs. Just a few days back(12/04/2007),Good Energies, a privately held firm that specializes in renewable-energy agreed to buy 66.7 millions shares of SOLF, sending shares of SOLF soaring. I believed that Good Energies should be considered an insider who has more in depth knowledge about SOLF future prospect and the inherent value of this company.

Shine your starlight
Is this Solarfun's time to shine? We haven't yet heard from you, and at Motley Fool CAPS, every investor's opinion counts. Weighing in with yours could be the difference between these stocks becoming shooting stars or supernovas. Considering it's free to sign up, and free to post your thoughts, why not use this opportunity to take your star turn?