7 Surprising 1-Star Stocks

Surprises are part of the game when it comes to picking stocks. Sometimes this means bad news -- like one of your top stocks revealing that its investment holdings are chock full of bonds backed by failing subprime loans.

Other times, though, the market gets caught off-guard by positive surprises from stocks that most investors considered down for the count. In this situation, investors who stood by the stock often break out into a chorus of "I told you so," while short sellers are forced to figure out just how much pain they can take.

To dig up some of these unloved, naysayer-defying stocks, I'm turning once again to The Motley Fool's CAPS community. Each of the companies below had received a one-star rating (the lowest) by our community of investors just 30 days ago:

It's important to remember that some of these stocks, particularly the smaller, more volatile ones, could just as easily reverse these big gains over the next 30 days. In some cases, though, their strength could signal that their companies' prospects have changed for the better, or that they'd been beaten down just a little too far.

Are these stocks better than CAPS players had thought, or just singing that proverbial swan song? Digging in and doing some research is the best way to tell. I thought I'd kick you off with some thoughts on Amazon.com.

See Amazon zoom
It's been a tough month for stocks to outperform, but the stocks above show that it certainly isn't impossible. Its short-term gains didn't top our list, but Stock Advisor pick Amazon has enjoyed an impressive run since late spring. Even the market's recent weakness couldn't take the wind out of the company's sails.

Fools on CAPS are collectively warming to the online e-tailing behemoth. After stalling at one star for most of the year, its stock has managed enough new outperform ratings, and convinced enough existing players to back off their underperform ratings, to pop up to two stars. The most recent pitch on the stock, from Firesale, is bullish on Amazon's second-half performance, as sales for the holiday season ramp up. Forror adds that the recent release of the new Harry Potter book should provide solid third-quarter earnings, predicting "a quick pop" in the stock when those results are announced.

But the business doesn't seem to be the big issue with CAPS' Amazon bears. Divagator concedes that "it's a fine company," but also balks at the stock's forward P/E ("Are you kidding me?"), currently perched at 71 times 2007 earnings and 51 times expected 2008 earnings. (On a trailing-12-month basis, it's 106 times earnings.)

Some have questioned whether Amazon's price action is truly connected to the company's prospects, or whether it simply owes to market mechanics. A couple of weeks ago, I highlighted the blog of CAPS player turleymuller, who claimed that Amazon's run is fueled by a combination of a wave of short-covering, long holders unwilling to sell, and traders' hesitancy to take new short positions. If he's correct, this means that any slide in Amazon's price could be similarly drastic; longs would be eager to "lock in profits," and new short sellers would smell blood and dive in.

Since Amazon's underlying business isn't in question here, there seems to be no good reason for long-term holders to jump out. Those who bought Amazon based on David Gardner's pick on Stock Advisor, for instance, are up more than 400% since the pick was made. And David's not backing away yet.

But should new investors consider Amazon shares right now? While it's tough to dispute that Amazon's P/E is higher than Cheech and Chong in Amsterdam, it's important to remember that P/E, though a good benchmark, is too simple a measure to support an entire analysis. Despite its premium price tag, Amazon has been delivering impressive growth and solid returns on both equity and capital.

Will Amazon come back to earth? Or is now a good time to take the plunge? Head over to CAPS and let the community know what you think. While you're there you can start your research on any of the other stocks listed above or any of the 4,900-plus stocks on CAPS.

More CAPS Foolishness:

• 5 All-Star Stocks on Fire
• Invest Like a Pro: Farallon Capital Management
• 7 Highly Rated Stocks on Sale 

Fool contributor Matt Koppenheffer didn't see these particular moves coming, but he's rarely surprised at Mr. Market's general tomfoolery. You can check out Matt's CAPS portfolio here, or visit his blog. He does not own shares of any of the companies mentioned. The Fool's disclosure policy is never going to give you up, it's never going to let you down, and it's definitely never going to run around and desert you.