Some companies are obviously great investments -- in hindsight. Sure, we should have bought Starbucks at its IPO and earned multibagger 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 5,500 stocks 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 companies approaching greatness:
China Precision Steel
Fording Canadian Coal
American Oriental Bioengineering
Some of these names might surprise you. Pharmaceutical giant Merck, for example, has been developing drugs and therapies for years. Almost great? Even familiar names can still offer some of the best opportunities. Perhaps we've just forgotten the potential they still hold. However, the 110,000 CAPS investors chose these companies as less obvious sources for tomorrow's great buys, so let's see why they might merit your attention.
Narrowing in on a niche segment, China Precision Steel sells cold-rolled steel products used in the manufacture of automobile parts and components, appliances, saw blades, and other areas where precision ultra-thin steel is needed. That steely-eyed determination has led to some significant growth, not only in revenue but also in profits. China Precision reported a 230% surge in net profits on only a 61% increase in revenue, as exports helped achieve a 750-basis-point improvement in operating margin.
Investors often lump China Precision in with other types of steel producers; when the steel market sold off the other day, this stock fell, too. But the markets served are different, and CAPS player Xandamere finds it undervalued in a high-demand market:
An undervalued niche producer of rolled steel products in a high-demand market. No debt, fast growth, trading at a trailing PE of 15? I'm sold.
Coal's second coming
The big pullback in coal the other day has many thinking that this isn't the bursting of a bubble, but rather the pause before the next jump upwards. With the industry on a tear lately, analysts view the breather as a necessary condition before coal takes off again. Demand remains high for coal around the world, and companies like Fording Canadian Coal, with interests in the world's second-largest producer of metallurgical coal, are positioned to benefit from any further surge.
Exported coal is going to continue to be strong in the medium term. While the projected increased demand in the U.S. hasn't really panned out, developing nations such as China are growing their imports at an exponential clip. If some of the alternative uses of coal, like gasification, catch on this trend will only be exacerbated.
What a waste
Optimizing combustion systems in utility, industrial, and municipal solid-waste applications isn't a particularly sexy industry, but factor in that Fuel Tech's systems are used in China to reduce pollution for coal-fired power plants, and it may be one of the biggest economic opportunities out there. It's estimated the country will be building the equivalent of one coal power plant per week for the next decade, and Fuel Tech is facing an enormous growth curve.
Fundamentally I think this company is currently overvalued, but I the prospects for growth are tremendous. The pollution control industry I think will grow massively in the future, especially as population will be growing more and more. If the US ends up moving back to being more Coal based or possibly towards using synthetic fuels made from coal, I think this could turn into growth machine.
A great opportunity for you
You've heard directly from the CAPS community on some of these stocks approaching greatness, but do you agree? Are these four-star candidates still investment-grade material? On Motley Fool CAPS, you can give your own input, which 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 -- it's completely free. Let's us hear what you have to say about the great and almost-great companies that interest you.