Top-Rated Stocks the Leaders Loathe

Momentum investors love to back companies with the wind in their sails. Contrarian investors typically pick up the cigar butts the market has tossed aside. So what do you call investors who turn against winners? Sourpusses? Shorts?

Over on Motley Fool CAPS, we sometimes call them the savviest investors around. When one of our All-Star players -- those whose stock-picking prowess places them in at least the 80th percentile of our community -- sours on a top-rated stock, perhaps we should take notice. Perhaps the player's found a chink in that highflier's armor, or a question mark in its financial footnotes. Or maybe it's just a hunch. That's why these tables aren't lists of stocks to buy or sell -- just starting points for further research.

Here's a list of stocks that some All-Stars have recently spurned:

Company

CAPS Rating (out of 5)

Est. LT EPS Growth

CAPS All-Star

Player Rating

Apache (NYSE: APA  )

*****

9%

mgiv

99.87

Flowserve (NYSE: FLS  )

*****

12%

farmerellis

99.87

Precision Castparts (NYSE: PCP  )

*****

17%

hptrades1

99.69

Acergy (Nasdaq: ACGY  )

*****

17%

Zarff

98.90

ViroPharma (Nasdaq: VPHM  )

*****

18%

denkab

95.61

 Source: Yahoo! Finance; Motley Fool CAPS.

Considering that, on average, 97% of all investors rating these companies think they will outperform the market, what might have turned some of CAPS' top players against them?

Spreading the risk
Up until now, ViroPharma was seen as a one-drug wonder whose antibiotic, Vancocin, was attractive in and of itself and had received generic protection of sorts from the FDA. Yet its agreement to buy out Lev Pharmaceuticals in a $443 million deal now doubles its portfolio. Lev's Cinryze is being developed as a replacement therapy for hereditary angioedema, a life-threatening genetic disorder leading to swelling of body extremities, face, and trunk. Analysts anticipate it will receive FDA approval this year. If approved, Cinryze will receive orphan-drug status, allowing ViroPharma to block competitors from the market here as well.

Even before the buyout announcement, investors like CAPS member enclaved were enthused about ViroPharma's potential:

Very undervalued drug manufacturer, heavy in cash, light in debt, earliest convertibles 2016, super product that may have a break with generic competition because the FDA does not have a protocol for the in-vitro type of drug this company makes. … still open to ruling though. Good pipeline possibilities. Possible reward outweighs risk imo.

What a gas
Sitting amongst some of the big mining operations like Rio Tinto (NYSE: RTP  ) and Alcoa (NYSE: AA  ) is Apache, an independent energy company whose natural gas supplies have been fueling the growth of those commodities engines. While a pipeline explosion at an Apache facility in Australia recently tested Alcoa's mettle, the company contributed to Rio Tinto's record iron ore production this quarter, providing two-thirds of the miner's energy needs.

Some investing All-Stars, like CAPS member TheGarcipian, find that not only is the demand cycle there for Apache, but that the company sports valuations that make it attractive as well:

Given the present investing climate of rising oil prices and seemingly insatiable demand for oil, I think this stock, with its very fair PEG ratio of 1.09 and an incredibly low EnterpriseValue-to-EBITDA ratio of only 6, is a bargain right now...

This company has interests in all the right places in the world: Gulf of Mexico, Texas, Australia, the North Sea, Argentina, Egypt, and Western Canada. Projected growth rates for the 1-yr, 3-yr and 5-yr time frames are all double-digits... Their margins are extremely healthy... Return on Assets is good ... [and] their Return on Equity is excellent....The only question is: can it sustain this growth? With an operating cash flow of $6.42B, I think it can.

Make lemonade from lemons
We've seen the direction some investors have indicated they believe these companies are heading, but Motley Fool CAPS is more than what the pros think, even if they're All-Stars. It's where we invite you to share your thoughts and insights and add your voice to the debate.

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


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