7 Surprising 5-Star Stocks

Using The Motley Fool's new investment community, Motley Fool CAPS, I've been keeping tabs on stocks that haven't lived up to their five-star ratings. That's right -- we're talking stocks that won the hearts of our CAPS community and then turned around and thumbed their noses at us. Did these stocks fool the Fool community into slapping on those five stars, or is this one of those times when Mr. Market has gone crazy and thrown a sale on some great stocks?

Here are the week's seven slackers, as identified by your fellow Fools on CAPS. Our community of investors gave each of these companies a five-star rating (the highest) just 30 days ago.

Of these seven stocks, four of them -- ViaCell, EntreMed, Camtek, and Boots & Coots -- have hung in there at five stars. Of the others, Meadowbrook slid down to four stars, and OmniVision and Spectralink both got bonked down to three stars.

What more can I say?
It's tough to pile on complaints when there's already plenty of good, well-thought-out, grade-A criticism out there on OmniVision. The company, which produces semiconductor chips for imaging applications -- including digital cameras, camera phones, and interactive toys -- has been losing ground all year. The recent drop, though -- all 16% of it in one trading session -- came last Friday, after the company announced its second-quarter earnings.

The problem is that, historically, OmniVision has had good margins and impressive growth. But recently, margins have started to feel the squeeze, and growth has been harder to come by. Part of the problem is product mix, where toy makers are buying mainly OmniVision's lower-end products. Additionally, on the competition front, Micron, a relatively recent entry in the market, has quickly taken a huge chunk out of the CMOS sensor market. There are definitely a number of emerging areas, such as automotive and pattern recognition, that could be growth drivers for the image sensor industry. Unfortunately, if customers continue to squeeze OmniVision and new competitors keep upstaging it, a growing market might not mean much.

So how did OmniVision end up at five stars to begin with? Well, as I said, it's a hot industry, and OmniVision has historically been the leader and innovator. On top of that, before the recent drop and earnings revisions, the stock was trading at a mere 12.4 times current fiscal year estimates, so the chances that OmniVision would pull out those pocket aces seemed like a relatively low-risk bet.

For value hunters, the current 13.2 times current year earnings may still seem inviting, but investors should consider that the stock has deteriorating fundamentals and a price that may not be as low as it seems. If I take the EPS for the first six months of the company's fiscal year, add on the midpoint of the third-quarter projections, and assume flat EPS for the fourth quarter, I get $1.06 -- the midpoint of analysts' estimates that gives the 13.2 P/E multiple. However, if I treat the company's stock option expenses as, well, expenses, then earnings for the year get nearly cut in half, and you're suddenly looking at a multiple more like 24.

Small but mighty?
With the exception of the $280 million risk management specialist, Meadowbrook Insurance, the rest of our five-star duds this week are all sub-$200 million market cap companies. But as Meadowbrook's former five-star rating shows, small doesn't necessarily mean undeserving of love!

For Meadowbrook, it was likely that investors, or maybe we should say traders, were looking for a little more from the company's third-quarter results. Though the company met Wall Street expectations on earnings, the stock sold off to the tune of 14% and has lost another 5% since then. But even after the drop, it's hard for longer-term investors to complain about the solid gains over the past year.

In the speculative world of stem cells, ViaCell clocked in back in early November with a third quarter that beat analysts' expectations and sent the stock up nicely. An upgrade from UBS, a top-ranked Wall Street firm in CAPS, didn't hurt, either. But over the past month, sellers have taken back those gains and then some.

For Camtek, a manufacturer of electronic component inspection equipment, third-quarter revenue that was up nearly 50% year over year (but down sequentially and at the low end of guidance) didn't catch the market's imagination, and the stock dropped 15%. Though it got a thumbs-up from another top-rated CAPS Wall Street firm, RBC, the company's recent growth slowdown is giving some investors pause.

So is it time to take advantage of these market specials? Maybe not, but a few of these five-star underachievers might be excellent candidates for further due diligence. In the meantime, get in the game and get yourself heard. Join the other 15,000-plus investors who have already become a part of the greatest investor community out there -- Motley Fool CAPS.

For more CAPS coverage:

• Small caps on CAPS (I'll give you a hint -- I like Syneron)
• CAPS gets oily
• More five-stars gone bad

Fool contributor Matt Koppenheffer pities the fool that ain't on CAPS. He does not own shares of any of the companies mentioned. The Fool's disclosure policy is as solid as the A-Team.