There will always be companies that are obviously great investments -- in hindsight. Through the rearview mirror, we know we should have bought Starbucks or Wal-Mart at their IPO, and realized thousands of percent returns over the years. Yet for every stock out there screaming "buy me," there are others that simply give us a nudge in the ribs and a knowing nod. They may be tomorrow's obviously great investments, but how do we tell them from the thousands of pretenders?
The stars' walk of fame
Over on our investor intelligence site, Motley Fool CAPS, we know these opportunities as four-star stocks. They rank higher than most of the other 5,000-plus stocks in the CAPS universe, but they're just shy of achieving stardom. In the long shadows of stocks that garner the coveted five-star rating, these top-tier companies are approaching greatness.
While the full "secret sauce" of how the ratings are calculated is kept 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 perform (a few months or a few years)
- The ratings of the investors who make the picks.
Every player is rated, just like every stock. The best and brightest players are considered All-Stars, and since they are more consistently correct than their peers, their opinions weigh more heavily in favor of (or against!) a stock.
Searching out of the spotlight
So while all the attention might be focused on the five-star stocks, good investments slip under the radar with only four stars. Yet we can sift through the CAPS database to find some of these four-star companies approaching greatness:
Smith Micro Software
American Oriental Bioengineering
Some of the names might surprise you. Dynegy was almost synonymous with Enron, until the latter started reporting accounting fiction. Sometimes we find that the most familiar names can provide some of the best investment opportunities, because we have forgotten about the potential they still hold. Just as meaningfully, the 73,000 investors on CAPS are giving these companies the nod as less obvious places to look for tomorrow's great buys. So let's delve into why these companies might merit your attention.
High-wire routine, without the wire
Wireless software developer Smith Micro might seem like a less-than-obvious choice, considering that its stock just shed 30% on apparently weak earnings. Without one-time expenditures, Smith Micro met analyst expectations, but that still didn't sit well with Wall Street's prognosticators, who suddenly realized that the company's reliance upon one customer -- Verizon
More than 700 CAPS investors weighed in on Smith Micro, and 97% of them believe it will outperform the market over time. CAPS All-Star Ebbs23 notes that Smith Micro is well-positioned to provide the multitasking technology people seek:
Cell phones aren't just for talking anymore. New technology/gadgetry is constantly evolving and being added to phones. Technology such as MP3 capability, cameras, video, harddrive storage etc. SMSI helps make all of that happen.
Earlier this year, the market and research analysts at Netscribes predicted that Smith Micro was poised to capture the growing integration of music in the wireless market. They said, in part:
Additionally, its patented data compression technology and strong focus on music management and wireless data management technologies will put it in a favorable position going ahead. This is anticipated eyeing the strong growth estimated in the music and wireless markets. On November 30, 2006 the company announced selling 4.5 million shares through a public offering. The proceeds would be used for further growth and development of product lines. Eyeing the company's growth oriented strategies and strong innovative product development, [Smith Micro]'s stock will march northward.
Perhaps they were a bit premature, but does the sell-off provide investors an opportunity to get in now at a good price?
A great opportunity for you
That's the current word on Smith Micro, but what are your thoughts? Are these four-star stocks still investment-grade material? On Motley Fool CAPS, your input can ultimately influence how they're rated. Outperform or underperform, near-term or well in the future -- your opinion counts.
Sign up today for Motley Fool CAPS, completely free. Let's hear what you have to say about the great and almost-great companies that interest you.
Fool contributor Rich Duprey owns shares of Wal-Mart, an Inside Value pick, but does not have a financial position in any of the other stocks mentioned in this article. You can see his holdings here. The Motley Fool's disclosure policy is at the top of its game.