Unloved Stocks Ready to Shine

Investor sentiment can be a powerful force in moving stocks. Think of it as a pendulum swinging in a company's favor. When investors begin to think highly of your company, it might be a sign that the stock will also start heading in the right direction.

Yet knowing when investors are beginning to warm up to a stock isn't always easy. Often, you can only tell after the stock has moved up -- but by then, it may be too late.

An astrolabe for investors
Investors at Motley Fool CAPS, however, have a way to monitor the progress of investor sentiment. Like every player on CAPS, each stock is given a rating from one to five stars, with five being the best. While the full "secret sauce" of how the ratings are calculated is proprietary, there are three factors that influence a stock's star rating:

• Whether a stock is rated "outperform" or "underperform"
• The length of time it is expected to take to achieve this performance (a few months or a few years)
• The ratings of the investors who make the picks

Like astronomers scanning the skies, investors can then track the movement of the stars. A stock's CAPS rating trend shows how investors feel about the stock over time, whether its star rating is on the upswing or trending down.

Investors can then use this information to help decide whether it may be a good time to invest in the stock. Here we're looking at some companies that have recently seen their ratings rise to from one star, the lowest possible rating, to two stars. Below is a table listing some of the stocks that have seen the stars start to align for them.

Obviously this is not a list of stocks to buy, but rather a starting point for further research. Consider these two examples. Cardica saw its star rating improve in late September just as its share price went through a second quick upward movement, seemingly underscoring the usefulness of watching the CAPS trend. However, Research In Motion began to move up in price in June, while its rating didn't begin to advance till July.

Does that negate the value of this strategy? Not at all! While the BlackBerry maker did make a big jump at the end of June, rising from about $55 a share to the mid-$70s in July, it gave back some of its share appreciation the following month, just as CAPS investors were getting interested. In August, the stock surged again, rising to a high of $88 a share, approximately a 33% increase in just one month. So it can still pay to keep your eyes on the stars.

A case of mTORrid growth?
Cancer treatment biotech Ariad Pharmaceuticals recently caught the eye of researchers at Merck (NYSE:MRK), who agreed to have the tiny company develop the drug deformolis, an mTOR inhibitor. Ariad's drugs regulate cell signaling, and as mTOR regulates cell growth, it might help treat solid tumors.

Several months ago, CAPS investor bata1 noted that the Merck deal would provide a measure of stability to a company that has previously given short shrift to shareholders.

This much maligned company's recently completed [collaborative] partnership with MRK promises, despite poor management on behalf of shareholders in the past, to provide financial stability, and a marketing conduit for the [commercial] development of novel [mTOR] inhibitors critical to the treatment of sarcomas (FDA [fast-tracked] due to special need). Since these inhibitors appear to be applicable to a wide range of other cancers and have few side effects, and this company is selling (considering the $75 mil upfront payment by MRK) for an enterprise value of about $174 mil, the buyer is getting enormous potential for next to nothing. Also, Aria's short ratio (of 7.4 ,16%+) and the fact that it has really bottomed should magnify the upside once it starts to move.

Fresh from a patent infringement lawsuit victory over Eli Lilly, the biotech has sent letters offering licenses to some 50 companies it believes are violating its patents. Their drugs achieve billions of dollars in annual sales, which could prove a boon to its bottom line. Yet some, such as Amgen (NASDAQ:AMGN), are fighting back, while Eli Lilly is seeking to have the patent invalidated.

Shine your starlight
We know what the bull and bear positions are, but we haven't yet heard from you. At Motley Fool CAPS, every investor's opinion counts. Weighing in with yours could be the difference between these stocks becoming shooting stars or supernovas. It's free to sign up and free to post your thoughts, so use this opportunity to take your star turn!