These Cold Stocks Are 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 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.

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
Step off the glitzy boardwalk in Atlantic City and you're immediately transported into a gritty, urban landscape. Travel to the marina section, though, and it's not quite so hardscrabble -- you have Harrah's, Trump, and the Borgata casinos to choose from. While the out-of-the-way location is a respite from the gloom, there's no relief from the depressing revenue situation.

Atlantic City continues to suffer falling fortunes, with gambling revenues down 9% in May and off 7.6% over the first five months of the year. The marina casinos are down an average 7.7% since the start of the year, but that's really skewed by the Trump Marina, which saw gambling revenues decline nearly 18%. Borgata and Harrah's were both down less than 5%.

So it could be a cause of hope for Boyd Gaming, since it owns the Borgata, with MGM Resorts (NYSE: MGM) having given up its interest in the casino. Revenues are down -- just not as bad as everyone else's. But Boyd also owns properties in Las Vegas and Louisiana and recently agreed to pay $278 million cash for the IP Casino Resort Spa in Biloxi, Miss.

Analysts peg the deal at around 7.2 times earnings and note that the figure is below what casino deals were going for during the boom periods. Biloxi is seen as a growth haven for gambling's resurgence, and though New Jersey's governor is taking over the AC boardwalk district, the mood is still pretty dour. So Boyd seems to be buying into a growing market at a decent price.

With 87% of the 444 CAPS members rating Boyd to outperform the market averages, it appears they're willing to bet it won't crap out. Let us know on the Boyd Gaming CAPS page whether it's worth rolling the dice on this casino operator.

Not so easy
Analysts also say the recession wiped out $13 billion in shareholder value between office-supply rivals OfficeMax (NYSE: OMX) and Office Depot (NYSE: ODP). A merger may be the only way to save one or the other -- or both -- and rumors are swirling that such a hookup could happen. Considering the competition they face from Wal-Mart, Target, and the biggest supplier on the block, Staples, there shouldn't be any problems from the antitrust crowd in Washington.

So what we see is how regulators misallocate resources by interfering in the marketplace. In 1997, Staples was blocked from acquiring Office Depot, which has rarely been a healthy operation, then or now. Rather than permitting a more efficient allocation of capital, regulators preferred to keep in place a false competitive marketplace, and now all the office suppliers suffer. Substituting the preferences of politically appointed overseers for the wisdom of the market rarely works out as intended.

Staples reported first-quarter earnings in May that hugely disappointed the markets, while also lowering its full-year earnings guidance as sales came in much weaker than anticipated. While the stock was crushed, I have to agree with CAPS member JPAKolypse86 that the valuation is now interesting for the disabled leader.

I like the combination of a value play and a low beta office supplier. Staples is very close to its 52 week low, and well of its high of $23.50 that it saw in the early part in this year. BUY BUY BUY.

You can supply your own opinion on the Staples CAPS page and track its turnaround by adding the stock to the Fool's free portfolio tracker.

No pain, no gain
Pain and immuno-inflammatory-disease drug developer Zalicus is another stock that's been knocked about through no fault of its own, even as the stock has almost doubled over the past year. Recent quarterly earnings were hurt because a rebate program by partner Covidien (NYSE: COV) took the wind out of its sails.

With analysts expecting royalties for Exalgo to hit $36 million over the next two years and Synavive heading into midstage trials, the prospects for further growth look strong.

But highly rated All-Star and CAPS biotech guru zzlangerhans is a bit more circumspect in his analysis of Zalicus, believing that Exalgo and Synavive are not the saviors many other investors believe it to be.

The company has just initiated a phase IIb trial in rheumatoid arthritis, and the prior failure in osteoarthritis has been blurred over to look like a success. And another thing the company and the pumpers aren't mentioning is that there was already a phase IIb trial of Synavive in rheumatoid arthritis, MARS-1, run synchronistically with COMET-1. What happened to MARS-1? The company killed the trial late in enrollment and swept it under the rug.

Care to rebut this? Head over to the Zalicus CAPS page and let us know whether you think there will be any pain relief in its 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.