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:
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 these otherwise widely admired stocks?
Something FISHy?
When China Medical Technologies reported earnings a couple of weeks ago, it beat even its own estimates for revenue. The strong sales owe to its fluorescent in situ hybridization, or FISH, system, which is used to detect the presence of specific DNA sequences on chromosomes. However, even as they boostedrevenue, those sales also cut into margins. The company hopes to overcome this problem by selling higher-margin reagents to run the FISH diagnostic tests.
Investors like CAPS player faboo28 liken China Medical's strategy to what Hewlett-Packard did with printers and ink cartridges: Give away the printer, then make up for it with higher-margin ink sales:
The company did announce one major shift in strategy during its most recent conference call. [China Medical]'s not going to rely on equipment sales as much and instead focusing on its reagent sales... So any lost revenue from equipment sales is more than made up in increased sales of reagents that the hospitals need in order to utilize that [China Medical] equipment. This is like what [Hewlett-Packard (NYSE: HPQ)] and Dell (Nasdaq: DELL) do with their printers. They sell them really cheap ... knowing that they can recoup that lost revenue from your repeated purchases of their expensive toners. You gotta love those recurring sources of revenue.
Taking a gamble
Another company playing its cards right is online gaming mogul GigaMedia. It's found significant growth opportunities through its Everest Poker site, which grew by 56% year over year.
Even so, some bullish investors, including CAPS All-Star metoo105, remain cautious about how far the Motley Fool Global Gains recommendation can grow. This player argued recently that the business's low barriers to entry, and a potentially capricious political climate, should encourage Fools to pick their entry price carefully:
I always thought that the extremely low barriers to entry in the (online-games) (gambling) (China)=(profit!!) equation were significant enough to warrant some caution as the shares raced ahead. Now that they've fallen back to levels that I feel are supported by their current cash flow and earnings, I am far more interested... [A further] risk in holding this stock is that China uses trade sanctions against Taiwan in their attempt to pursue their foreign policy agenda of reincorporating Taiwan into the PRC. There should be little doubt that the economic damage would be nearly entirely one-sided.
Make lemonade from lemons
We've seen where some investors believe these companies are heading, but Motley Fool CAPS is more than what the pros think -- even if they're All-Stars. On CAPS, we invite you to share your thoughts and insights and add your voice to the debate. Go ahead, have your say. We're eagerly waiting!
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