What This Downgrade Means for You

Although the market takes Wall Street analysts' downgrades seriously -- at least for a day or two -- here at The Motley Fool, we don't. Instead, we pay much closer attention to the collective knowledge of our 170,000-plus Motley Fool CAPS members. When they downgrade a stock, I like to take a second look to see why.

I've listed three stocks that our CAPS members have downgraded to a lowly one- or two-star rating over the past six months.

A Bakken disappointment
Since announcing fourth-quarter earnings in early March, Northern Oil and Gas has headed nowhere but south. It even landed on our "Most Heavily Shorted" list in May, a distinction no company could be proud of. But the reasons it landed on the list were what caused investors to ask questions.

Northern Oil and its Bakken cousin, one-star stock Voyager Oil & Gas (AMEX: VOG), were called into question by stock investigator The Street Sweeper. All-Star Clawhammer08 took notice: "According to (The Street Sweeper) these guys have seen recent acceleration in insider selling of shares since this web-site broke the story that detailed a large amount of shady/questionable dealings in which the principles of [Northern Oil] have engaged in their pasts. This same story also quotes industry insiders who say that [Northern Oil] is not accounting for properly projecting future well depletion properly, which easily inflates their numbers when compared with other, possibly more legitimate players in the Bakken Shale region."

Sites committed to unearthing lemon stocks often have their own interests at heart, but this report has helped give Clawhammer08 a winning pick so far.

A twinkle of hope, but no revenue any time soon
After a nice run-up in recent months, CAPS members have grown skeptical of ZIOPHARM's value recently. The company isn't close to commercializing any of its product-development portfolio, and a capital raise earlier this year was an opportunistic time to raise cash. All-Star zzlangerhans saw it as a sign that shares wouldn't stay high long: "The company is facing at least a year with no clinical trial catalysts, and it looks like they're preparing for a drought of positive developments with heavy dilutive financings. I'm going to go with the company's own apparent pessimism about the direction of their share price."

Small-cap pharmaceutical stocks are risky investments, and CAPS members have voted this one off the four-star island.

Leveraged generator gone wrong
Billionaire investor Carl Icahn has made a lot of profitable investments in his time, as we saw on Thursday, when Southern Union (NYSE: SUG) was bought out by Energy Transfer Equity (NYSE: ETE). But his natural-gas play in Dynegy hasn't gone quite as planned. A deal to sell the company to the Blackstone Group fell through, and although shares haven't suffered since, financial results haven't exactly been stellar.

The company is expected to lose $1.42 per share in 2011 and another $1.43 in 2012, leaving Puccini3005 to wonder what the future of Dynegy will look like:

I'm not sure what Icahn has in mind for Dynegy, now that the sale to Blackstone was blocked. I sold my tiny position this morning for a huge loss (I bought it several years ago). The market valued Dynegy less than 1/2 of what the share price is now before the Blackstone offer. Maybe Icahn wants to buy it himself ... for $2.66 a share.

NRG Energy (NYSE: NRG) has also been left on the sidelines since its deal to buy a third of Dynegy's assets fell through along with the Blackstone deal. A "going concern" statement in Dynegy's SEC filing added more confusion, and as billionaires fight over the company's future, CAPS members have run for the exits.

Foolish bottom line
A stock upgraded to four or five stars has earned a little more due diligence, if not a spot on My Watchlist. A one- or two-star rating is worth a second look and may signal that it's time to sell. Either way, the collective wisdom of the CAPS community can help steer Fools toward winning investments.