Unloved Stocks Ready to Shine

Think of investor sentiment as a pendulum that swings in tandem with a company's share price. When investors begin to think highly of your company, its stock might also start heading in the right direction. Alas, you can rarely tell when investors are warming to a stock until after it's made that upward swing.

An astrolabe for investors
But Motley Fool CAPS' proprietary ratings, aggregated from the opinions and accuracy of 82,000-plus investors, offer a great way to monitor investor sentiment. Like astronomers scanning the skies, investors can follow a stock's stars through its CAPS rating trend, tracking investor sentiment to help determine the best time to invest. Let's look at one- or two-star-rated companies that have recently enjoyed a bump in investor confidence and see whether the stars are really aligning in their favor.

Obviously, this is not a list of stocks to buy -- just a starting point for further research. Still, consider the case of Capital One, which CAPS investors downgraded at the end of August although the market was still bidding up its shares. In November, the company announced that it was charging off hundreds of millions of dollars because of persistent delinquencies and the declining housing market. Its shares dropped 15.5% that day, and they've pretty much been falling ever since. But now, CAPS investors are looking up again, and the shares are following suit.

What's in their wallet?
Capital One is known for its commercials featuring marauding Vikings who are ultimately thwarted by the low costs associated with Capital One's credit cards. But lately, the company's stock has been acting as if it's been pillaged. The financial company has been in its deathbed after having to write off an ever-growing amount of collectibles each month.

Yet as it has diversified away from solely relying on its credit card business by buying up a few banks, Capital One has also begun weaning itself off the riskier lending habits it has traditionally employed and is focusing on more creditworthy customers. That hasn't been an easy transition. It lost $900 million last year as a result of writing off the GreenPoint Mortgage unit, for example, but the finance company will be better for having done so in the future.

That's why CAPS investors aren't so sure. More than 700 investors have opined on Capital One, and fully 26% of them think it will still underperform the market. In this pitch from earlier this week, CAPS investor bmcginni thinks there's just still more bad news waiting to be charged up on Capital One's account:

Lending company with their hands in a lot of ticking time bombs-consumer credit, small business credit, auto loans, etc. The next subprime mess will be in consumer credit. Consumer is using credit cards to keep themselves afloat. With rising interest rates and lending institutions in increasing financial trouble, they're going to come calling on the consumer for cash. Cash they don't have.

While a quarter of the CAPS community thinks Capital One's stock is overdrawn, that still means three-quarters see it as performing well. Top-rated All-Star goldsinger thinks that whatever bad news there may be for the financial stock, it's already been priced in. Here's the pitch from a couple of weeks ago:

This is a contrarian play but it looks extremely oversold and all the bad news must be in the price. The bad news may persist for a while but this could be a good recovery play on a 2-4 year view. I may be a tad early but in taking a longer term view this could be a good recovery.

And CAPS player valueoftiming also sees the diversification Capital One has achieved as underpinning its future growth. Here's part of the pitch, written last month:

Capital One's core strategy provides a competitive advantage in targeting specific customers and pricing risk appropriately. This, coupled with a strong brand name, makes the firm a major player in the industry. ... Additionally, because rate increases generally accompany a strong economy, credit losses usually decrease. The acquisition of established, deposit-gathering regional banks gives Capital One a great source of cheap funding, which it can use to fund high-yield consumer loans. Capital One is very successful at its in-house collections.

Shine your starlight
Will Capital One recharge? Well, we might not have heard from you yet, and at Motley Fool CAPS, every investor's opinion counts. Your voice could determine whether these stocks become shooting stars or supernovas. Since it's free to sign up and post your thoughts, why not use this opportunity to take your star turn?