Surprises are part of the game when it comes to picking stocks. Sometimes this can mean bad news, like discovering that one of your top stocks' 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 thought were down for the count. In this situation, investors who stood by the stock often break out into a chorus of "I told you so," as short sellers are forced to figure out just how much pain they can take.
To dig up some of these unloved but naysayer-defying stocks, I'm turning once again to The Motley Fool's CAPS community. Each of the companies below had received the lowest one-star rating from our community of investors just 30 days ago:
|
Stock |
30-day return |
One-year return |
Current CAPS Rating |
|---|---|---|---|
|
China
Finance Online |
104.3% |
222.6% |
** |
|
Lihir Gold |
40.7% |
64.3% |
** |
|
DryShips |
38.5% |
420% |
* |
|
Beacon Power |
23.4% |
42.6% |
** |
|
Discovery Laboratories |
23% |
24.1% |
* |
|
I-Many |
20.8% |
41.6% |
** |
|
Downey
Financial |
20.6% |
(1.4%) |
* |
I'm not recommending that you run out and buy these stocks! Their low ratings are a big, flashing red light. CAPS players have been pretty adept at picking out good stocks, and even better at pointing out bad stocks to avoid. In fact, an index set up to short the least-liked stocks in CAPS has outperformed nearly 98% of all other CAPS players.
In other words, most stocks that are rated with one star in CAPS are likely to underperform. However, CAPS players aren't perfect. They've been overly negative on stocks such as Crocs and DryShips, both of which have delivered seriously impressive returns to investors thus far.
So the question is whether any of the stocks in that table might be one of those undercover rockets. (Technically, one of them is, since DryShips made the list this week.) To kick off your research, here are some of my thoughts on China Finance Online (CFO).
Few investors can claim to have scored a double in just a month, but anyone holding this stock in their portfolio over the past month can. Since last Thursday alone, the stock is up 40%!
One of CAPS' top players, BrianRuth, is bearish on the stock, quipping that "2 out of 3 spam buzzwords isn't bad." At first glance, I'd be tempted to agree. However, a bit more digging revealed that CFO is a pretty interesting-looking business. The company provides Chinese investors with information about the nation's financial markets and stocks.
Last Friday, it also announced its purchase of an 85% stake in a brokerage to expand its business scope. This is interesting, since as CAPS All-Star hjxandly points out, the Chinese have "huge [amounts] of cash deposited in the bank" that is being moved to trading accounts.
That's the business. The stock, on the other hand, is pretty darn expensive, trading at more than 50 times its expected 2007 earnings. While this is usually enough to turn me off completely, China Finance Online has been soaring so far in 2007. Revenue for its most recent quarter, ended in June, was up 43% from the previous quarter and 290% year over year. It's unlikely that CFO could maintain 300% annual growth for too long, but if its torrid growth continues at anything near that pace, its current valuation may prove more interesting than it seems at first blush.
Will CFO continue to grow like crazy? Or is this shooting star ready to fall? 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 5,000-plus stocks on CAPS.
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