5 Cold Stocks Heating Up

When a stock's share price is lower than the mercury in 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 has made that move up.

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 recently enjoyed a bump in investor confidence to see whether they're truly heating up.

Source: Motley Fool CAPS; NA=not available.

Obviously, this is not a list of stocks to buy -- just a starting point for further research. Yet if some CAPS members are taking notice of these stocks, maybe we should, too. 

Caution: Contents may be hot
Two months ago, CAPS All-Star member Defshark82 pointed out that biopharmaceutical Labopharm could be a winner if the supplier for its drug trazodone resolves its problems.

The trazodone debacle has hurt the stock recently. However, I see potential in the sales of tramadol. I think with the FDA's recent statements about vicodin and percoset, that it could mean an increase in tramadol prescriptions. If all gets settled with trazodone and approval is granted, Labopharm would have two approved drugs on the market one dealing with pain and one treating depression. I like the upside.

Those pieces have fallen into place, with Labopharm reporting that the Food and Drug Administration has classified the supplier's manufacturing facilities as acceptable. With that, the company is hoping it will win approval for trazodone, its once-daily treatment for depression. When the regulatory agency sent Labopharm a response letter back in July, it never commented on the drug's effectiveness, just on the supplier's facilities. With that issue behind it, Labopharm remains confident about being able to launch the drug next year.

Extended-release formulations such as those Labopharm develops are part of a competitive niche. Flamel Technologies (NASDAQ:FLML), for example, has been building on its use of nanotechnology to control the timely release of drugs. This was a $21 billion industry in 2008 and is expected to grow to $29 billion over the next decade.

Red-hot or ice cold?
They say politics makes strange bedfellows, but so does business sometimes. Take clothing maker American Apparel. Not only has it faced questions about its financial propriety -- the CEO criticized a former chief financial officer for being "a loser" and having no credibility in the industry -- but also the propriety of that CEO, who has faced several sexual harassment claims. Add in exceedingly provocative, occasionally explicit advertising that would make Abercrombie & Fitch (NYSE:ANF) blush, and you have to wonder how the company snagged a licensing deal with Sesame Street. Sesame Street!

Nevertheless, American Apparel is still dealing with financial difficulties. Although it received a temporary waiver on an $80 million line of credit, the retailer says it might exceed the maximum leverage ratio the loan agreement allows. Sales aren't going too well, either, as comps fell 15% for September, and were down 16% for the entire third quarter.

Earlier this year, CAPS member starpark88 noted the opportunity and danger that American Apparel represents as an investment, concluding that it would beat the market's returns.

Their CEO is great at clothier. He is unique, has great style, and original ideas. But, he does not run a public company well. CEOs cannot behave as he does w/o messing with stockholders. He has had at least 4 legitimate sexual assault lawsuits made on him, and almost [bankrupted] the company with overexpansion.

Although it seems American Apparel is getting hotter in the estimation of some investors, it will fade if it doesn't get its house in order. Immigration officials are charging that almost 30% of its factory workers are illegal aliens, so it faces fines of up to $800 per employee. This may be an investment more threadbare than one of its racy ads.

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 are hot numbers, and which offer cold comfort. It's free to sign up.