Momentum investors love to back companies with the wind in their sails. Contrarian investors typically pick up the cigar butts the market has tossed aside. So what do you call investors who turn against winners? Sourpusses? Shorts?
Over on Motley Fool CAPS, we sometimes call them the savviest investors around. When one of our All-Star players -- those whose stock-picking prowess places them in at least the 80th percentile of our community -- sours on a top-rated stock, maybe we should take notice. Perhaps the player's found a chink in that highflier's armor or a question mark in its financial footnotes. Or maybe it's just a hunch.
Following is a list of stocks that some All-Stars have recently spurned. The table isn't a list of stocks to buy or sell -- just a starting point for further research.
|
Company |
CAPS Rating |
1-Year Return |
CAPS All-Star |
Player Rating |
|---|---|---|---|---|
|
Potash Corp. of Saskatchewan |
**** |
188.4% |
litost |
99.75 |
|
Cal-Maine Foods |
**** |
126.5% |
alvinbentley |
99.90 |
|
China
Unicom |
**** |
79.0% |
doitbetter |
94.79 |
|
Chevron |
***** |
12.8% |
dkoncsol |
99.54 |
|
United Technologies |
***** |
7.7% |
introscop |
98.01 |
Considering that on average, 96% of all the investors think these companies will outperform the market, what might have turned some of CAPS' top players against these otherwise widely admired companies?
Crossing the road
Egg producer Cal-Maine Foods was a top-performing stock in 2007, as egg prices were driven higher because of greater demand and the higher costs associated with producing them.
Yet as corn prices rose from increased ethanol production, feed costs soared as well. That meant Cal-Maine had to raise prices. But there wasn't any angry clucking from investors, as trailing net margins rose from a scrawny 1.7% at the end of the quarter ended November 2006 to a plump 12.6% in the same period this year. That ain't no chicken scratch.
After doubling in value last year, Cal-Maine's shares have tacked on another 11% so far this year. It's certainly a welcome reprieve for investors, who had egg on their faces from poor returns in the two previous years. The Atkins and South Beach diet fads were on the wane, and as demand for eggs fell, the stock got scrambled. Yet even though Cal-Maine's stock has laid a few golden eggs lately, some investors may be seeing some cracks.
Fighting the crowd
Still, fewer than a dozen CAPS players see Cal-Maine underperforming, and only four All-Stars see the stock cracking. In fact, only one investor has seen fit to whip up his rationale for thinking the egg beater is going down. Top-rated All-Star ActiveValueFund, with a 99.01 player rating, thinks the cyclicality of Cal-Maine means the goose is almost cooked: "Same story, second verse. Inflated egg prices swing with heavy volatility around chicken supply."
CAPS player ajm101, however, may better represent the majority of investor sentiment. This player sees some macroeconomic forces working in Cal-Maine's favor:
Inflation is working its way across the Pacific, up supply chains from energy, and across the board because of monetary policy. I don't think that eggs will continue to increase in price like recently, but I don't think they will correct sharply, and they should be able to pass through some of higher feed costs. At least worth a P/E greater than 7.
Make lemonade from lemons
We've seen the direction some of the All-Stars have indicated they believe these companies are heading, but Motley Fool CAPS is about more than what the pros think, even if those pros are All-Stars. At CAPS, we invite you to add your voice to the debate. Go ahead, have your say. We're eagerly waiting!
