5 Cold Stocks Heating Up

When a stock's share price is lower than a North Dakota thermometer in February, investors tend to give it the cold shoulder. But as the market warms to a stock's prospects, its price can heat up in a hurry. Alas, you can rarely tell that a stock is melting investors' hearts until after it's made that upward leap.

Taking the market's temperature
But Motley Fool CAPS' proprietary ratings, aggregated from the opinions and accuracy of 140,000-plus members, offer a great way to monitor investor sentiment. Following a CAPS rating trend can help us determine the best time to invest. Let's look at previously rated one- or two-star companies that have recently enjoyed a bump in investor confidence and see whether they're truly heating up -- or headed back to the deep freeze.

Source: Motley Fool CAPS.

Obviously, 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. 

Caution: Contents may be hot
Communications equipment provider Ciena certainly turned in a respectable quarter earlier this month. With expectations for revenues to run flat sequentially next quarter, the IT provider may have hit a bottom and has potential for turning a profit next year. Analysts, though, seem to be hedging, looking a little further out before giving Ciena the green light to move into the black.

Yet highly-rated CAPS All-Star member mrindependent says Ciena has a history of making sales but posting losses, and with analysts expecting the red ink to continue flowing into the future, he's not buying into the dream:

This stock survives on dreams. Supposedly, its position in the Internet equipment business will supposedly pay off as bandwidth needs increase exponentially. Unfortunately, the company historically generates lots of sales and no profits. Analysts don't expect profits anytime soon. Overvalued considering its historical and projected losses.

Consumer demand is the tailwind behind the stock right now. Customers of Verizon (NYSE:VZ), AT&T (NYSE:T), and other telecom providers are looking for increased capacity and more service offerings. To give them that, the telecoms will need to spend more on Ciena's equipment. It feels that, even where pricing remains competitive, its portfolio and feature sets are differentiated enough from the competition to allow it to forecast profit margins remaining in the mid- to high-40% range.

But it's hard to argue with the fact that despite these positive signals, the optical, Ethernet, and access equipment vendor faces some strong headwinds, too, including the need for the telecoms to remain cautious. If the economy weakens again, Verizon and Sprint Nextel (NYSE:S) aren't going to be in the mood to go on a spending spree, and they'll delay purchases for a time. For example, while Verizon saw a 28% increase in wireless customers as a result of its Alltel acquisition, average revenue per customer per month declined 0.8% last quarter. If revenue gains slow further, equipment purchases may have to be put on the back burner.

With the field winnowed considerably as a result of Nortel's demise, Ciena is looking to be one of the winners for the company's metro Ethernet networks division. Nortel's 40-Gigabit/second and 100-Gigabit/second technology would make an interesting acquisition. For example, Huawei was able to ingratiate itself with Level 3 Communications by having a 40-Gbit/s PCI to offer at the expense of Infinera (NASDAQ:INFN), which did not.

Still, according to some, the mobile Internet will be the biggest technological development since the Internet itself. CAPS member SierraBlue agrees with Jim Cramer that Ciena will be a part of the biggest technological development that drives tech companies forward in the future.

Checking the mercury
Are these stocks invitingly warm or bitterly frosty? 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 hot little numbers, and which offer cold comfort. It's free to sign up.