5-Star Stocks Leaders Have Soured On

Momentum investors are stock players who get behind companies that have the wind in their sails. Contrarian investors typically pick up the cigar butts that 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. Not only does the 60,000-strong investor-intelligence community rate thousands of stocks every day, but the players themselves get rated, too. The best of the lot -- what CAPS calls All-Stars -- consistently outperform their peers over time and are assigned ratings of 80 or greater.

When an All-Star player sours on a top-rated five-star stock, perhaps we should take notice. Maybe they've uncovered the chink in the highflier's armor. It could be they've found a question mark in the company's financial-statement footnotes. Or maybe it's just a hunch. That's why we say these tables are not lists of stocks to buy or sell, but rather starting points for further research. With about 10,000 stocks in the universe to choose from, this list can drastically whittle down that number. Read the pitches for or against a stock the investors write, and then dive into the financials.

Here's the list of stocks that the all-stars of the All-Stars -- those with player ratings of 95 or better -- have put the frowny face on.

More than 4,600 investors have rated these stocks, with an average of 96% of them being bullish on their prospects. And 97% of the All-Stars think they'll outperform the market, too. What might have turned these top players against the widely admired companies?

Navigating turbulent times
When you look at the one-year return, you might think that the doubling of Garmin's stock played a part in tenmiles' negative rating. In fact, he does use technical analysis to bet against the GPS manufacturer. "Technical sale suggested at $96 for expected 10-15% retracement within two quarters," he writes.

Yet the navigation-systems maker has reported 16 consecutive years of growth and has inked deals with a number of carmakers, including Ford (NYSE:F), to have its GPS systems offered at dealerships throughout the United States. Sure, they stand the risk of becoming commoditized, and a decline in average selling prices has dented margins, but earnings growth itself has been strong, compounding at a rate greater than 30% for about the past decade. Still, with a price-to-earnings ratio of 34, it might be just a bit pricey.

Fluor has also enjoyed a decent return over the past year, undoubtedly reflecting its worldwide engineering experience, and its business has been growing accordingly. It has attracted new interest in recent days as the tragic bridge collapse in Minneapolis focuses attention on the dilapidated state of our nation's infrastructure -- and the need for services that Fluor offers. A bet against it here, at least for the long term, might be a dicey play indeed.

At the head of the class
Of these three top-rated companies looking to fall further, student-loan processor and securitizer First Marblehead might just be first in its class. Its two biggest customers -- Bank of America (NYSE:BAC) and JP Morgan Chase (NYSE:JPM) -- have decided to become partners in its biggest rival, SLM (NYSE:SLM). Although both have reiterated their support for the Motley Fool Hidden Gems recommendation, First Marblehead no longer negotiates from a position of power.

Or does it? The deal with Sallie Mae is fraught with uncertainty. Just the other day, the student-loan provider reaffirmed that the deal would close by October, and sources close to the buyers say this is in no way true. SLM faces potential legislative and regulatory issues that may make it less attractive than it first seemed. If that deal falls through, it might be that First Marblehead is holding all the cards when its customers come back to renegotiate contracts.

The bear argument is perhaps best outlined by industry analyst and research firm Netscribes:

Even the positive forecast for the securitization business is hindered by the uncertainties arising out of contract renewals by Bank of America, which account for 30% of the same. Of late the company [is] losing bargaining power as clients like JP Morgan Chase have renegotiated a deal forcing it to purchase loans at a higher premium. The company sees potential in its relationship with General Electric and [is] awaiting the spring season applications. Though the student loan market is around $15 billion, with expectations of doubling in 2010, competition from players like Sallie Mae entering the market [and] lack of awareness among the parents makes soft landing a difficult task in 2007.

Top-rated All-Star investorpoet counters that considering the prospects for generating revenue, the stock is mispriced:

First Marblehead generates significant gains on their securitizations, some in excess of 10% of the amount securitized. They can generate these gains due to their track record and their access to the TERI database. First Marblehead has over 20 years of history on prepayment rates and default rates, the two biggest factors in modeling future cash flows for securitization. Because of this, they can achieve favorable treatment from rating agencies and investors purchasing the asset-backed securities that they issue. In addition, the company can book some of the future cash flows of the subordinate bond classes that they hold upon securitization based on some assumptions. If these assumptions prove conservative, First Marblehead can anticipate an additional cash stream from these subordinate bonds in the future. The reverse is also true, if prepayment and default rates rise above the company's models, they will have to report this miss as a loss.

When running simple valuations, it is obvious that there is some serious bad news priced into this stock. The company is a leader in an industry that is growing at almost 30%, but they are not priced this way at all.

Raise your hand
We've heard both the bull and bear arguments here, but Motley Fool CAPS is more than what some pros think, even if they're All-Stars. It's where 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!

Bank of America and JPMorgan Chase are both recommendations of Motley Fool Income Investor. First Marblehead is a recommendation of Motley Fool Hidden Gems and Motley Fool Inside Value. Garmin is a recommendation of Motley Fool Stock Advisor.

Fool contributor Rich Duprey owns shares of Ford. You can see his holdings here. The Motley Fool has a disclosure policy.