What This Downgrade Means for You

The market may take Wall Street analysts' downgrades seriously -- at least for a day or two -- but here at The Motley Fool, we don't. Instead, we pay much closer attention to the collective knowledge of our 170,000-plus Motley Fool CAPS members. When they downgrade a stock, I like to take a second look to see why.

Below, I've listed three stocks that our CAPS members have downgraded to a lowly two-star rating over the past six months:

CAPS rating out of 5 stars.

A lump of coal
Puda Coal has taken a turn south along with Chinese reverse merger stocks in a similar story to Duoyuan Global Water (NYSE: DGW) and Advanced Battery Technologies (Nasdaq: ABAT). And the news hasn't gotten better recently. Shares were halted a week ago with "news pending," and investors have been stuck in limbo ever since. To make matters worse, this week a number of law firms tripped over themselves running to announce class action lawsuits on behalf of shareholders. At best, the waters are treacherous going forward and I could see this being a one-star stock before long.

Puccini3005 is already having second thoughts about giving Puda a thumbs up on a limit order but was saved from a lump of coal by trading this stock on CAPS before putting in an order with a broker:

oh man, I wish I could have this one back... This opened on a caps limit order for what I thought at the time would be a very attractive entry point. I'm oh-so-grateful I didn't have a corresponding buy limit.

Beware of the hot pharma stock
Drug researcher Curis has been on a nice run since the company received positive results from its skin cancer treatment trial with Roche subsidiary Genentech. But the company has gathered a few red thumbs on CAPS from investors who've seen this story before. mdriver78 isn't buying the run-up saying:

Spike in price on reports of success in Phase II Trials never seems to hold up and expect the stock to drift back from wince it came.

Curis is a ways from generating any significant revenue on its cancer treatments and as exciting as its products may be a negative announcement can crush the stock overnight. If you want to see how fast tides can turn take a look at how fast MannKind (Nasdaq: MNKD) popped and plunged when FDA rulings came out.

Trouble brewing in e-commerce
E-commerce provider Digital River's stock has recovered from losing its biggest customer Symantec (Nasdaq: SYMC) two years ago but profits have yet to come back strong. The company currently trades at a lofty 84 P/E ratio and any slipups could send the stock reeling. Buffalonate makes a simple bearish pitch saying: "Drastically overpriced."

joe951 thinks competition will play a role in this stock underperforming:

In the past year I have seen a few newer providers of similar services that offer more features, and much better price points. I think their customer churn from (adding fees) as well as this new better competition will make this stock underperform.

Worth a second look
A stock upgraded to four or five stars has earned a little more due diligence, if not a spot on My Watchlist. A one- or two-star rating warrants a second look at your investment thesis and may signal that it's time to sell. Either way, the collective wisdom of the CAPS community can help steer Fools toward winning investments.