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, three factors 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 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 use this information to help decide whether it is a good time to invest in the stock. Here we look at companies with the lowest ratings -- one and two stars -- that have seen investor confidence upgraded one notch higher. Below is a table listing some 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 a stock from last week's list of unloved companies.

Hyperdynamics (AMEX:HDY) saw its CAPS rating improve through the summer, briefly touching five stars. About the middle of August its rating began to fall fast while its stock essentially traded sideways. Investors were growing concerned about the oil and gas exploration company and dropped it down to two stars in early October. But the stock held up for two weeks before finally plummeting by about 30%. CAPS investors have recently marked up the rating again. It can pay to keep your eyes on the stars.

Not a chip off the old block
Chip maker Micron Technology has suffered at the hands of the market in the past year. A glut of DRAM and NAND memory chips has depressed prices, and the company has reported three consecutive quarters of losses. While memory makes up nearly 90% of Micron's revenues, DRAM in particular is responsible for two-thirds of them. A partnership with Intel (NASDAQ:INTC) and a firm footing in the DRAM market just might allow Micron to recover sooner than anticipated.

Yet CAPS investors are cautiously bidding it back up on the theory that the company has been beaten down too far for all the underlying capabilities it still possesses. All-Star MCHSkdog, with a 98.12 (out of 100) player rating, sees the proliferation of memory-needing electronic consumer devices pushing Micron forward.

I've finally come around to approving this DRAM laggard. Now I think the fundamental supply and demand picture for DRAM and NAND flash has to improve in light of the iEverything catalyst devices.

That seems to be the thinking behind CAPS investor ironsheep's outperform rating:

There is a long-term trend in place driving up demand for NAND flash and DRAM products. New iPods, ultra-portable laptops, high-end cell phones, and embedded electronic devices all look poised to leverage these technologies like never before. Recent pricing pressures have led to a devaluation of this stock -- and rightly so. However, the bears have gone too far, punishing a company excessively for a temporary trend completely outside its control, while management has been actively reducing overhead in the meantime.

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 super novas. Considering it's free to sign up and free to post your thoughts, use this opportunity to take your turn at being a star.