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 returns in the thousands of percent 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 the investor intelligence site Motley Fool CAPS, we know these opportunities as four-star stocks, companies that rank higher than most of the other 5,200 stocks in the CAPS universe but are just shy of achieving stardom. In the long shadows of stocks with the coveted five-star rating are top-tier companies approaching greatness.
While the full "secret sauce" of how the ratings are calculated is proprietary, there are three factors that influence a stock's 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 as every stock is rated. The best and brightest of these players are considered All-Stars, and because they are correct more consistently than their peers, their opinions weigh more heavily in favor of (or against) a stock.
Beyond the spotlight
So while all the attention might be focused on the five-star stocks, good investments with only four stars might slip under the radar. Yet we can sift through the CAPS database to find some of these four-star companies approaching greatness. Here are several that turned up recently:
Northern Dynasty Minerals
You might be surprised by some of the names. Phone giant Verizon, for example, isn't exactly unknown, yet it still holds true that sometimes the most familiar names can mean some of the best investment opportunities if for no other reason than we have forgotten about the potential they still hold. Just as meaningful, the 75,000 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.
Fool's gold or rich vein
The stock of USEC, which supplies low-enriched uranium to commercial nuclear reactors, has taken a drubbing since May, when it hit all-time highs of $25.65. While a number of CAPS leaders have soured on the company, its ratings -- which fell in line with the stock -- have recently ticked back up. Does this mean the beginning of a resurgence?
More than 500 CAPS investors have weighed in on USEC, and 95% of them view it as outperforming the market over time. CAPS All-Star epetroel is a bull with a healthy dose of realism about what problems the uranium supplier faces.
The market hates uncertainty, and this company has lots of it.
First, their long term success depends largely on the success of their new state-of-the-art "American Centrifuge" plant which should dramatically reduce their costs in refining uranium (and consequently make them dramatically more profitable). However, that project has been beset with delays and cost overruns (first it was supposed to cost [$1.7 billion], then 2.3B, now 2.5-2.8B).
Second, their contract with the Russian government under their "Megatons to Megawatts" program to convert old nuclear warheads to fuel for reactors is set to end in 2013. After that point, the Russian government will essentially be competing with them. The company has been lobbying the U.S. government pretty intensely to prevent the Russian [government] from eating their lunch here in the U.S. after 2013, but there have been no promises made by the [government] to help them yet.
Third, in order to finance their American Centrifuge project, they have issued a huge number of additional shares and convertible securities that have diluted the value of the existing shares. They have also indicated that they may do this again in 2008 to raise more money for that project.
There are a number of other smaller issues, but those seem to be the biggies. Regardless of all the issues, I'm still thinking it's a buy at this price. Unless the company goes bankrupt (which seems unlikely) you're probably going to do well with it over the next year or two.
The world seems to be turning green, and nuclear power is one of the greenest forms of energy. Yet is USEC the one that will help power us up?
A great opportunity for you
That's the current word on USEC, but what are your thoughts? Are these four-star stocks still investment-grade material? On Motley Fool CAPS, you can give your input, which ultimately can influence how some stocks are rated. Outperform or underperform, near-term or well in the future, your opinion counts.
Sign up today for CAPS; it's 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 Intel and Wal-Mart 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 has a disclosure policy.