Some companies are obviously great investments -- in hindsight. Sure, we should have bought Starbucks at its IPO and earned hundredfold returns over the years. Yet for every stock out there screaming "buy me," others simply give us a nudge and a nod. How can we tell tomorrow's obviously great investments from the thousands of pretenders?
The stars' walk of fame
On Motley Fool CAPS, these opportunities can be found among our four-star stocks. In CAPS' proprietary ratings system, they rank higher than most of the other 5,300 companies in the CAPS universe, but they're just shy of superstardom. While all the attention might be focused on their five-star peers, we can sift through CAPS to find four-star firms approaching greatness. Here's a sample for this week:
American Eagle Outfitters
Some of these names might surprise you. DuPont, for example, has been around for more than 200 years, and it's one of the world's largest chemical companies. Almost great? Even familiar names can still offer some of the best opportunities. Perhaps we've just forgotten the potential they still hold. The 82,000 CAPS investors chose these companies as less obvious sources for tomorrow's great buys, so let's see why they might merit your attention.
For too long, teen retailer American Eagle has been grounded by slowing sales. Weather, housing, and credit issues have all taken their shots at other retailers like Gap
Shares of the Motley Fool Stock Advisor pick have been off more than 40% over the past year -- until yesterday, at least. A favorable article in Barron's over the weekend helped American Eagle buck the market's decline with a near-11% jump in price. To help make the company fresh again, the teen retailer is targeting little kids with a new concept store, perhaps hoping to create mindshare with younger consumers.
As a result of its share-price drop over the past 12 months, valuations of American Eagle have begun to look so good that some analysts believe it could be the best stock of 2008. That potential value has some CAPS All-Stars -- like themattgrdt, with a 99.54 player rating -- sardonically asking whether the retailer sells clothes or houses:
Judging from the stock price, AEO doesn't sell clothes to teenagers who don't [care] whether or not the economy's in a recession. Apparently they build homes while cranking out as many subprime mortgages as possible. Who knew?
Other All-Stars, like ToKReason, ultimately see American Eagle as a company that Warren Buffett would like because of the wide popularity of its clothes:
"Buy what you know." I wear American Eagle. I see people wearing American Eagle. We're more comfortable in that kind of business. It means we miss a lot of very big winners. But we wouldn't know how to pick them out anyway. It also means we have very few big losers -- and that's quite helpful over time. We're perfectly willing to trade away a big payoff for a certain payoff.
-- 1999 Berkshire Hathaway annual meeting.
With 95% of CAPS investors rating American Eagle an outperform, they think the retailer's shares will soon reflect the quality of the company itself.
A great opportunity for you
You've heard the latest on American Eagle, but do you agree? 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 us hear what you have to say about the great and almost-great companies that interest you.
American Eagle, Berkshire Hathaway, and Gap are Stock Advisor selections. Berkshire and Gap are also recommendations of Inside Value. You can get a 30-day free trial to any of the Fool's investment services. The Motley Fool owns shares of American Eagle and Berkshire Hathaway.