5 Cold Stocks Heating Up

Think of investor sentiment as a pendulum that swings in tandem with a company's share price. When investors begin to think highly of your company, its stock might also start heading in the right direction. Alas, you can rarely tell when investors are warming to a stock until after it's made that upward swing.

An astrolabe for investors
But Motley Fool CAPS' proprietary ratings, aggregated from the opinions and accuracy of 130,000-plus members, offer a great way to monitor investor sentiment. Like astronomers scanning the skies, investors can follow a stock's stars through its CAPS rating trend, tracking investor sentiment to help determine the best time to invest. So let's look at previously rated one- or two-star companies that have recently enjoyed a bump in investor confidence, and see whether the stars are really aligning in their favor.

Source: Motley Fool CAPS, as of 4/17/09. EPS = earnings per share.

This is not a list of stocks to buy -- just a starting point for further research. Yet if some of the best investing minds are taking notice of these stocks, maybe we should, too. 

The sun's always shining somewhere
Serving two masters is always a difficult task, so Myriad Genetics sought a Solomon-like solution: By the end of June the biopharmaceutical will have spun off its drug development arm, Myriad Pharmaceuticals, leaving behind the diagnostic test maker. Myriad's BRACAnalysis genetic indicator test should benefit from the American College of Obstetricians and Gynecologists recommending that screening for hereditary ovarian and breast cancer be routinely performed. Analysts believe that with routine screening, the number of patients Myriad screens could double or triple.

The decision to split up the company was achieved through some decidedly un-Solomon-like wisdom. Management revealed that they were actually slaves to Wall Street's opinion. They would take into consideration the expectations that analysts had for growth and earnings, so management decided to shed the slower, more challenging route of drug development.

It's not so much the break-up that rankles, but rather management's short-sighted view of what its primary objectives ought to be. In the short term, the split could be a smart move; after all, Sequenom (NASDAQ:SQNM) is another diagnostic test maker perceived to have a bright future. But over the long haul management will become distracted by constantly looking over its shoulder to see whether the Street approves of its decisions. Blunders are likely to be made by managing earnings for analysts.

With the growth projections soaring, though, the business looks like it will bail out management for the time being. Each year, more than 192,000 women in the U.S. learn they have breast cancer, with as many as 10% of them having a hereditary form of the disease. The potential for helping these women detect the genetic markers has investors intrigued. CAPS member FRINEDOFFOXY, for example, wrote recently about the tremendous long-term earnings estimates:

One of the most profitable and promising small-cap stocks in the biotech industry. Has the products and affilations for earnings growth in 25 - 35 % bracket over the next five years.

With the marketing campaign for BRACAnalysis that Myriad has been engineering, it is quickly becoming synonymous with testing for breast cancer, much the way Merck (NYSE:MRK) was able to associate its Gardasil with prevention of human papillomavirus and cervical cancer. Let's hope management remembers that running the business and developing it for shareholders is more important than the whims of Wall Street.

Shine your starlight
So are these stocks driving ahead or ready to crash? It pays to start your research on these stocks on Motley Fool CAPS. Read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made -- all from a stock's CAPS page. Then weigh in with your own thoughts on which stocks you think are shooting stars or supernovas. Since it's free to sign up and post your thoughts, why not use this opportunity to take your star turn?