5 Cold Stocks 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 150,000-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
We've all heard the admonition to not short stocks because the markets can remain irrational longer than you can remain solvent. That's what makes CAPS an excellent testing ground to try out investing strategies, and Exact Sciences seems to underscore the validity of those two ideas.

Last December CAPS All-Star fcfroic made a cogent argument against investing in the developing DNA-based technology provider, pointing to a lack of operating revenues and potentially high expense risks:

Net revenue is primarily composed of the amortization of up-front technology license fees associated with a license agreement with [Laboratory Corp. of America]. The unamortized LabCorp up-front payment is being amortized on a straight-line basis over the remaining exclusive license period, which ends in December 2010. Similarly, revenues are recognized from the amortization of up-front fees paid by Genzyme. In other words, there are no operating revenues as of yet. ... In other words, there is no operating revenue and clearly no operating cash flow.

Since then, Exact's stock has jumped 28% and is up more than 400% over the past 12 months. As another CAPS All-Star Troy2008 notes in a reply to fcfroic's argument, when it comes to development stage biotechs, the laws of reason and investing need not apply.

Hows that workin out for ya? Hint; Bio-techs don't have to have earnings, just the promise of it. Trust me. [Dendreon, Human Genome Science, Sequenom], etc.

Building a support structure
Similar arguments could probably be raised for Incyte, another biotech that doesn't have any drugs commercialized just yet but has collaboration agreements with Novartis (NYSE: NVS) and Eli Lilly (NYSE: LLY) with several pipeline candidates in late-stage clinical trials.

Although shares of Incyte have also had a strong run over the last year similar to that experienced by EXACT, CAPS member fireinyoureyes sees Incyte's pipeline of potential therapies as a source of even greater gains in the future:

2 big deals, and potential for some more on the way, Incyte has one potential blockbuster drug with Phase 3 results coming this year for Myelofibrosis, and a potential to be used for many other cancers. Good pipeline of other drugs too.

Head over to the Incyte CAPS page and tell us if you see this developing into something big. Already 91% of the 241 CAPS members rating the drug developer believe it will outperform the market.

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.