Some companies are obviously great investments -- in hindsight. 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 5,300 rated companies, but they're just below the top rung. While all the attention might be on their five-star peers, we can sift through CAPS to find four-star companies that stand out. Here are a handful of them:
- Fuqi International (NASDAQ:FUQI)
- LDK Solar (NYSE:LDK)
- Nordic American Tanker (NYSE:NAT)
- Silver Standard Resources (NASDAQ:SSRI)
- Toyota (NYSE:TM)
Some of these names might surprise you. Toyota, for example, overcame General Motors to become the world's biggest carmaker, and three of the five top-selling Cash for Clunkers cars were Toyotas (the Ford (NYSE:F) Focus was tops overall). Almost great? Even familiar names can still offer some of the best opportunities. Perhaps we've just forgotten the potential they still hold. However, some of the 140,000-plus members of CAPS chose these companies as less obvious sources for tomorrow's great buys, so let's see why they might merit your attention.
In the sight of greatness?
Fuqi International makes jewelry from gold and other precious metals, making it a play on China's growing middle class. While it has beaten analyst earnings expectations for five quarters in a row, revenues fell short of forecasts in the third quarter, and guidance for the fourth quarter apparently didn't wow the market, despite a boost for full-year guidance. Its shares have dropped 15% since the report.
The market's moves puzzled investors who believe the company is still turning in a solid performance. Particularly with gold at record highs, this should play into Fuqi International's hands extremely well, perhaps allowing for a sixth straight quarter of beating expectations. Online jewelry retailer Blue Nile (NASDAQ:NILE), for example, hasn't experienced the same sort of negative reaction, despite a stratospheric valuation and Web traffic falling by 39% in October.
The negative sentiment regarding Fuqi International, however, has been the subject of some intense debate among some of CAPS' highest-rated members.
In response to Prodigy16's question of how a company with an impressive record of growth can be valued at such a comparative discount, All-Star dibble905 pointed to a blog discussion for CAPS members.
Member zloj writes that the question was asked backwards, saying Fuqi International had soared well above fair value; China is at high risk for another recessionary setback. JaysRage says it's more a case of profit-taking coupled with a stronger dollar, while russiangambit believes the low valuation has to do with sector rotation. dibble905 suggests the market overreacted after the company didn't raise fourth-quarter guidance when it was optimistic about the full-year numbers.
Fuqi International, at just 11 times trailing earnings and eight times next year's profits, does seem to offer a significant discount, particularly when we see that analysts are forecasting long-term earnings growth of about 26% annually.
Although Fuqi International has used plenty of cash in recent quarters, it's because it wants to have enough jewelry on hand to meet demand in the fourth quarter, and inventories have soared from the end of last year. Yet the biggest increase is in raw materials, suggesting that sales could indeed be robust. Fuqi International also has opened 11 new stores compared with a year ago, so it needed stock for them.
Where do you fit in? Is this just a market overreaction that's providing investors with a good entry point, or is the company simply winding down from an excessive valuation that it didn't deserve in the first place? Let us know your position on Fuqi International's CAPS page.
A great opportunity for you
Investor sentiment suggests these four-star investments still seem to be on their way to five-star greatness, but it pays to start your own 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.
Sign up today for the completely free service and let us hear what you have to say about the great and almost-great companies that interest you.
