Unloved Stocks Ready to Shine

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Think of investor sentiment as a pendulum that swings in tandem with a company's share price. When investors begin to think highly of your company, its stock might also start heading in the right direction. Alas, you can rarely tell when investors are warming to a stock until after it's made that upward swing.

An astrolabe for investors
But Motley Fool CAPS' proprietary ratings, aggregated from the opinions and accuracy of 80,000-plus investors, offer a great way to monitor investor sentiment. Like astronomers scanning the skies, investors can follow a stock's stars through its CAPS rating trend, tracking investor sentiment to help determine the best time to invest. Let's look at one- or two-star-rated companies that have recently enjoyed a bump in investor confidence and see whether the stars are really aligning in their favor.

Company	CAPS Rating (5 max)	Recent Price	1-Year Return
Tanzanian Royalty Exploration (AMEX: TRE)	***	$6.88	20.5%
Microsoft (Nasdaq: MSFT)	***	$34.33	17.3%
Wal-Mart (NYSE: WMT)	***	$48.40	4.3%
Xinhua Finance Media (Nasdaq: XFML)	**	$5.47	(51.8%)
Rackable Systems (Nasdaq: RACK)	***	$8.59	(73.0%)

Obviously, this is not a list of stocks to buy -- just a starting point for further research. Still, consider the case of Motley Fool Stock Advisor pick Time Warner (NYSE: TWX), which CAPS investors downgraded in mid-October, at the same time AOL was announcing a 20% cut in its workforce. The parent company's shares, which had leveled off, began sliding again. But now CAPS investors are looking up again, and the shares may just follow suit. Please note, though, that even though CAPS sentiment seems to track longer-term results, it would be un-Foolish to use changing CAPS sentiment to predict such short-term price movements. It's a chicken/egg thing.

Rolling, rolling, rolling!
An economic recession is looking more imminent, according to some analysts, and retailers are taking a bath as a result. Despite high hopes that the holiday shopping season would salvage an already tough year, department stores, specialty shops, and clothing retailers are all reporting disappointing news. As housing prices drop and credit dries up, consumers are reining in their free-spending ways more and more. It seems the wrack and ruin is everywhere.

Everywhere, that is, except at mass merchandiser Wal-Mart, a retailer that consumers seem to flock to, particularly in hard times, to get decent quality at discounted prices. Where Target (NYSE: TGT) saw same-store sales decline more than 5% in December, Wal-Mart enjoyed more than a 2% increase in its comps.

Analysts suspect that the product mix may be just as responsible as the economy. Target has been bringing in higher-price-point fashion and household goods, and that's been hurting the company as spending slows down. Wal-Mart, which also has those types of items, is cushioned by having a greater diversity of less expensive merchandise.

While Target has done better in comps comparisons for most of the year, the icy grip of recession seems to be grabbing hold of more consumers these days, and Wal-Mart's positioning should serve it well.

CAPS player MCKIrobert thinks the spate of bad news that surrounded Wal-Mart in the past has dissipated. Our All-Star sees a number of very good reasons why investors ought to consider the retailer once again:

1. It's at its lowest P/E ratio ever.
2. No signs of an earnings slowdown, even in the long run. Even if the consumer gets hit hard in '08, I'm betting WalMart sales don't get hit as hard as other stores.
3. WalMart is expanding well into international markets. I don't see any reason why they won't do well there.
4. The negative press it has received lately regarding workers' medical care has unnecessarily made the stock unpopular.

Another CAPS player, Haventaclue1, agrees that Wal-Mart's mix of good quality at good prices resonates with consumers:

After a little funk, they seem to have gotten their act together. This is the store ... America will run to during a recession to save a few dollars so they can then run to Starbucks and indulge in coffee [paradise]. Not [your] average discount (better quality), but prices to please the penny pinching consumer.

Shine your starlight
Will Wal-Mart rebuild a wall of profits? Well, we haven't yet heard from you, and at Motley Fool CAPS, every investor's opinion counts. Your voice could determine whether these stocks become shooting stars or supernovas. Since it's free to sign up and post your thoughts, why not use this opportunity to take your star turn?