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These Cold Stocks Are Heating Up

By Rich Duprey - Updated Apr 6, 2017 at 10:15PM

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Investors are warming up to these previously unloved companies.

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 170,000-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.

Company

CAPS Rating
(out of 5)

Recent Price

EPS Estimates (This Year - Next Year)

KV Pharmaceutical (NYSE: KV-A) *** $4.08 NA - NA
Sara Lee (NYSE: SLE) *** $18.72 $0.86 - $1.06
Whole Foods Market (Nasdaq: WFMI) *** $64.77 $1.81 - $2.08

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 of the best investing minds are taking notice of these stocks, maybe we should, too. 

Caution: Contents may be hot
Time heals all wounds. Johnson & Johnson (NYSE: JNJ) still sells Tylenol despite the deaths caused by someone who poisoned the product in the early 1980s. Bridgestone and Firestone still sell tires despite the blowouts caused by faulty manufacturing. Merck (NYSE: MRK) still sells drugs even though Vioxx was less than healthy for you.

And KV Pharmaceutical will sell its preterm birth drug, Makena, despite shooting itself in the head with a pricing scheme that made it look like it was trying to profiteer off of at-risk babies. PR disasters happen -- though KV seemingly went out of its way to make itself look simply awful -- but companies recover.

The first step the pharmaceutical company took was to offer financial assistance to those who couldn't afford the $1,500-per-dose cost for medicine that previously went for $10 or $20 (can you say "everyone"?). When that feeble attempt failed to mollify its critics, it cut the price to $690. But with powerful political foes lined up against it, the FDA said it wouldn't grant KV exclusivity for Makena, meaning the original lower-cost options were still available. That means KV is going to have to come down even more on price. If it does that, it should recover.

It's fun to poke fun at a company's miscues, but CAPS All-Star TSIF said last week that while risk still abounds, the worst of the danger is behind it:

I'm not sure if the $4 will hold at this point. It's still well above where it was a few months ago before Makena was approved, but the threat of bankruptcy should be gone. Options expires tomorrow and there may be some market movers trying to lower the "pain threshold". $4 seems a reasonable entry point, from a risk/reward, possible additional speculation angle.

You can continue to diagnose the problem on the KV Pharmaceutical CAPS page.

Something to nosh on
If nobody doesn't like Sara Lee, then maybe they'll like it even more as two distinct companies. While I think they should name the two units Sara and Lee, the consumer products player will be splitting itself up along geographic lines: The North American unit will retain the Sara Lee name, while the international beverage and bakery division will be spun off.

There's a lot of interest building in the space. Tastykakes recently got bought by Flowers Foods for $34 million. Diamond Foods agreed to buy Pringles from Procter & Gamble (NYSE: PG). If there was a time to get these deals done, now would seem to be it.

CAPS member GoDawsGo thinks spiraling food prices will ultimately hurt Sara Lee, though All-Star TMFDeej finds it to be an attractive special situation play.

Keep an eye on the spinoff developments by adding Sara Lee to your watchlist, and see if it ends up turning into one of the Lee sisters: ghastly, beastly, or ugly.

Getting the urge
Ever since organic grocer Whole Foods Market proved the viability of an upscale grocery shopping experience, KrogerSafeway (NYSE: SWY), and most other supermarket chains for that matter, have had to respond by adding healthy choices to their own aisles.

For Fool contributor Tim Beyers, management is the difference between Whole Foods and the copycats. Whole Foods Co-CEO John Mackey might appear to be a loose cannon to some, but to most he's a passionate leader -- and cheerleader -- for his company. His management makes the difference.

While organics may be the future of groceries, CAPS member jimmywells agrees it takes good leaders to make a good company:

1) Organic foods is the wave of the future. 2) They own this corner of the market. 3) It's a great experience shopping there even if you're not an organic buff. 4) Their values attract customers that are willing to pay up for their products. 5) Good leadership will be good stewards of the finances

Use the Whole Foods Market CAPS page to share your thoughts on what separates it from the competition.

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.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Whole Foods Market, Inc. Stock Quote
Whole Foods Market, Inc.
WFM
The Hillshire Brands Company Stock Quote
The Hillshire Brands Company
HSH.DL
Merck & Co., Inc. Stock Quote
Merck & Co., Inc.
MRK
$73.89 (-0.74%) $0.55
Johnson & Johnson Stock Quote
Johnson & Johnson
JNJ
$157.09 (-0.63%) $0.99
The Procter & Gamble Company Stock Quote
The Procter & Gamble Company
PG
$147.26 (0.59%) $0.86

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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