7 Surprising 5-Star Stocks

In The Intelligent Investor, Ben Graham introduces readers to a charming, manic-depressive fellow who goes by the name of Mr. Market. Mr. Market's game is to pay you house calls on a daily basis to offer to sell you the interests in businesses that he owns or to buy from you interests in businesses that you own. Because of Mr. Market's bipolar affliction, he will sometimes show up at your door fantastically excited about the prospects for the future and will want a sky-high price for his business interests, and he'll similarly offer you premium prices for your interests. At other times, he'll become inconsolably depressed about what the future may hold and will offer to sell you his wares at prices as low as pennies on the dollar.

Though Mr. Market never holds it against you if you ignore him, he will talk your ear off about however he feels that day and try to convince you of the merit of his current views. As an investor, your task is to figure out the value for the items that Mr. Market is hawking, buy from him when he offers low prices, and sell to him when he gets too excited about certain items. This week I've picked out seven stocks from The Motley Fool's CAPS community that earned five-star ratings from CAPS members, but whose price has been cut over the last 30 days. Are these examples of Mr. Market getting too depressed, or are they not top-quality merchandise after all?

So here are the week's stars on sale, as identified by your fellow Fools on CAPS. Each of the companies below had been given a five-star rating (the highest) by our community of investors just 30 days ago:

CAPS members seem to be rethinking Select Comfort and Linktone a bit, as both were scaled back to four stars, while Celestica was dropped all the way down to two stars. Raven Industries, optionsXpress, ICO Inc., and Acadia all managed to hang onto their perfect five stars.

Blackbird not quite singing
It's been a really nice run for the small-cap Raven Industries over the past few years, with EPS growing above 25% per year, accelerating top-line growth, and improving profitability. The company was even named recently to Forbes' list of America's best small companies. Though CAPS members have stuck by Raven and continue to rate it five stars, investors have started to back away since the company announced third-quarter earnings. Not only did Raven miss third-quarter EPS estimates, but it also announced that the fourth quarter would be roughly flat on a year-over-year basis. The shortfall has been largely attributed by Raven to the weakness in the agricultural market, which is impacting sales in its flow controls division.

The question that investors are obviously wrestling with at this point is whether this is a bump in the road for the company or whether the party may be ending. Though total sales are up about 11% for the first nine months of the year, this is notably less than the 22% top-line growth Raven saw in 2005, or the 18% in 2004. EPS growth has been even more tepid so far this year, up just 4% over the first nine months of last year. Potentially more concerning is the fact that, after a number of years of steady increases, performance metrics like gross margin, operating margin, and return on equity have fallen off slightly so far this year.

Despite the five-star rating, CAPS members' analysis is mixed. All-Star GemHater has this to say:

"This company doesn't have a moat. It makes the moat. Its business is high tech liners and plastic films. It's boring from end to end. It's in a state with probably the best labor ethic in the United States, and corporate friendly from end to end. It has a budding business in low altitude communications transponders. It has been researching and testing these for some time. If they can get these perfected, the market will be enormous."

Meanwhile, another CAPS All-Star, stabfederline, counters with this:

"Raven used to be a money maker but now it has cooled considerably. Top reasons to sell are: 1) new management, which is death for a small company; 2) industry wide disappointment & [with] negligible growth; and 3) Raven itself has reported flat earnings. Considering that estimates have priced it at its previous (remarkable) growth pace, the next three quarters will be substantially disappointing."

Weighing your optionsXpress
Sometimes constant flow of information is good, though sometimes it gives investors a little too much to think about. Last week, optionsXpress announced monthly performance metrics for November and saw a sharp sell-off in the wake of slower-than-expected growth in new customer accounts. New accounts were up 29% year over year, but just 1% over the previous month.

For a company that has been extremely impressive since it went public in early 2005, such a sell-off on one month's data seems to be a bit harsh to this Fool. While I certainly wouldn't say that slowing growth in new accounts is meaningless, for an investor, a single month's worth of lukewarm performance shouldn't be quite that scary -- especially when you're talking about a company that has 60%-plus operating margins and has grown its top and bottom line more than 50% for the first nine months of the year.

CAPS members weighing in since the drop are unanimous, and the overwhelming theme seems to be buying opportunity. CAPS All-Star LoneIguana shared these thoughts:

"Finally reasonably happy with the valuation at this point -- not enough to buy in real life, but good enough to add to my CAPS line-up. There may be more opportunistic times ahead to add this a bit lower, but overall the current price and growth prospects feels inline with outperform expectations over an extended period."

So is it time to take advantage of some of these blue-light specials Mr. Market is offering? Maybe not, but a few of these five-star underachievers might be excellent candidates for further due diligence. In the meantime, get in the game and get yourself heard. Join the other 17,500-plus investors who have already become a part of the greatest investor community out there.

For more CAPS coverage:

• Go against the herd.
• Who's going to bounce?
• Five-stars aren't the only surprises.

Select Comfort is a Motley Fool Hidden Gems pick.

Not on CAPS yet? Fool contributor Matt Koppenheffer says, "I pity the fool that ain't on CAPS." He does not own shares of any of the companies mentioned. The Fool's disclosure policy is tougher than BA Baracus himself.