5 Stocks Approaching Greatness

Some companies are obviously great investments -- in hindsight. Yet for every stock out there screaming "buy me," others simply give us a nudge and a nod. How can we tell tomorrow's obviously great investments from the thousands of pretenders?

The stars' walk of fame
On Motley Fool CAPS, these opportunities can be found among our four-star stocks. In CAPS' proprietary ratings system, they rank higher than most of the other 5,400 starred companies, but they're just shy of superstardom. While all the attention might be focused on their five-star peers, we can sift through CAPS to find four-star firms approaching greatness. Here are a handful of four-star firms approaching greatness.

  • China Natural Gas (Nasdaq: CHNG  )
  • Qiao Xing Universal Resources (Nasdaq: XING  )
  • China Marine Food Group (Nasdaq: CMFO  )
  • CDC (Nasdaq: CHINA  )
  • Depomed (Nasdaq: DEPO  )

Sure, this list is essentially all Chinese small caps, but some of these names still might surprise you. China Marine Food Group, for example, is under suspicion over its finances, much like two other four-star stocks, China SkyOne Medical and Fuqi International. And Qiao Xing Universal Resources is shifting from telecom company toward a focus on natural resources. Yet it's also trying to buy Qiao Xing Mobile (NYSE: QXM  ) , a mobile handset company that it spun off only a few years ago, and in which it already holds a 60% stake.

Almost great? Even familiar names can still offer some of the best opportunities. Perhaps we've just forgotten the potential they still hold. The 170,000-plus CAPS members chose these companies as less obvious sources for tomorrow's great buys so let's see why they might merit your attention.

In the sight of greatness?
Not every Chinese small cap is a fraud, probably not even most, but the spate of problems being reported taints everyone with "guilt by association." China Natural Gas did itself no favors when it recently said that its previous annual and quarterly filings could no longer be relied upon, though the trouble doesn't seem as calamitous upon closer inspection. Lousy, but not fatal.

Earlier this year, the leading provider of compressed natural gas for cars in Tier 2 city Xi'an obtained a $17.7 million bank loan, pledging its equipment and vehicles as collateral. A few months later, though, CNG's outside counsel said, "Nuh-uh, you can't do that." Apparently, it violates the terms of another loan CNG has outstanding. That lender now has the right to consider CNG in default on the terms and accelerate the note. Worse, that action would cause a simultaneous default on the terms of the warrants it issued at the time, meaning that the warrant holders could demand their warrants be redeemed. What a mess. That's why China Natural Gas said, "You know what? Ignore all that financial information we gave you before."

So far, the main lender, Apax Lotus, hasn't moved to declare CNG in default. If it does, the natural gas provider still has 30 days to rectify the problem. Management, however, met with Apax and is working on a debt restructuring to satisfy the terms, and the company has also hired Ernst & Young as its auditor to keep it on the straight and narrow in the future.

With 1,600 CAPS members weighing in on China Natural Gas, 98% believe it will go on to outperform the broad market averages. You can fire up your own thoughts on the China Natural Gas CAPS page.

On the shoulders of giants
When you buy shares of CDC, you're actually buying a series of companies, including an enterprise software company, IT services, online games, and an Internet portal -- China.com.

CDC says it has a multi-pronged effort underway to unlock shareholder value, including buying back shares and engaging in M&A activity. It recently did a 1-for-3 reverse split, a move CAPS member Retracement considers an integral part of that initiative, though Locktheprofits takes a far more dim view of the situation.

You can weigh in yourself on the CDC CAPS page, and add the stock to your My Watchlist to get all our Foolish news and analysis on the company aggregated for you.

A big opportunity
Our one non-China based stock, Depomed, has been having a good run, after a tough summer that featured a recall of certain lots of Glumetza. The stock is up 50% year to date, and has nearly doubled since its July low point. It recently received a $500,000 milestone payment from Covidien (NYSE: COV  ) , which started human testing of an extended-release painkiller using its technology, and got a $5 million payment from Janssen Pharmaceuticals following delivery of a prototype for a sodium glucose transporter 2 inhibitor. It's also entitled to receive an additional milestone payment from Janssen plus royalties on future sales.

With 151 of the 165 CAPS members who've rated Depomed believing it will outperform the market, it seems clear that they think the stock has a good chance of reaching more of them milestones. Head over to the Depomed CAPS page, and let us know whether you think this biotech will relieve investor pain in the future.

A great opportunity for you
Investor sentiment suggests that these four-star investments still seem to be on their way to five-star greatness. Still, it pays to start your own research on these stocks on Motley Fool CAPS. Read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made all from a stock's CAPS page.

Sign up today for the completely free service, and let us hear what you have to say about the great and almost-great companies that interest you.

Covidien is a Motley Fool Inside Value pick. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Rich Duprey currently does not own any stocks as you can see here. The Motley Fool has a disclosure policy.


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