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 market sentiment. Like every player on CAPS, each stock is given a rating from one to a maximum five stars. 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 companies with the lowest ratings -- one and two stars -- that have seen their investors' confidence rise a notch:

Obviously, this is not a list of stocks to buy, but rather a starting point for further research. Consider Hyperdynamics, which saw its CAPS rating improve through the summer, briefly touching five stars. Around the middle of August, its rating began to fall quickly, while its stock essentially traded sideways.

By early October, the oil and gas exploration company was down to two stars. However, the stock held up fairly well for another two weeks, before plummeting by about 30%. Now that CAPS investors have recently marked up the rating again, it'll be interesting to see whether the company can reverse its recent woes.

Just how sick is WellCare?
Managed-care provider WellCare Health Plans saw shares drop a dizzying 63% in one day after announcing that its offices were raided by the FBI. In the days afterward, the stock lost half of its remaining value. While shares have recovered a little of that lost ground, thanks to improving earnings, the company seems a bit speculative at this point. Meanwhile, shares of competitors AmeriGroup (NYSE:AGP) and Molina (NYSE:MOH) have held up well.

Yet CAPS investors seem to be cautiously bidding WellCare back up, on the theory that the company still has lots of value, even if allegations of wrongdoing prove true. All-Star ddberg isn't sure WellCare is an investment he'd risk his own capital on yet, but he thinks it could end up a winner:

The various media reports suggest that wrong-doing was blatant, but the actual damage was relatively minor... [E]ven if the investigation is resolved quickly, a lot of damage has been done to the company's reputation. But this was an awfully strong company prior to the scandal, and a haircut of 70% (net to date) seems extreme unless the investigation reveals much worse improprieties than what's currently known. Not necessarily a bet I'd make with my own money, but seems like a reasonable bet in CAPS.

That seems to be the thinking behind CAPS investor manbearbull's decision to give WellCare an outperform rating:

Worst case: the company is fined and people go to jail and the company is liquidated. They've got almost $40/share cash plus other assets. As an asset play it seems less speculative than people suggest; it's undervalued even in pieces.

The more likely scenario is that the company pays some fines, policies are changed, and the stock recovers a significant fraction of its value. Even worst case, I'm not seeing a huge risk.

In this case, investors definitely might want to let the dust settle before moving forward, even if it means missing the bottom. It's a far less risky approach, but it still allows for appreciable returns.

Shine your starlight
We know where 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. Since it's free to sign up, and free to post your thoughts, why not use this opportunity to take your star turn?