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 125,000-plus members, 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 previously rated one- or two-star companies that have recently enjoyed a bump in investor confidence, and see whether the stars really are aligning in their favor.

Source: Motley Fool CAPS, Yahoo! Finance.

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.

The sun's always shining somewhere
Bed Bath & Beyond may simply end up as the last man standing in the retail home-furnishings sector. Competitors Linens 'n' Things and Bombay Company have folded, while Pier One Imports will be closing more than 10% of its stores, having essentially become a penny stock. Cost Plus seems not far behind.

Whenever this recession finally ends, the bed and bath decoration chain will probably be one of the few industry players still viable. Nonetheless, it has its own set of issues to worry about. The retailer will need to tuck in high inventory on its balance sheet. It's stuck in a promotional environment begun with Linens 'n' Things' bankruptcy, but extended because of the weak economy. And it's facing stiffer competition from Wal-Mart Stores (NYSE:WMT), where consumers are flocking these days to stretch their dollars. Having once been charmed by the discount megaretailers' "everyday low prices" concept, those fickle consumers may be reluctant to go back to Bed Bath & Beyond.

The powerful draw of Wal-Mart is even convincing Target (NYSE:TGT) to emulate its rival, bringing in more consumable goods and hoping greater volume will offset the lower margins it's now willing to accept. We may see more retailers presume to change their own models to stanch Wal-Mart's growing success, further squeezing Bed Bath & Beyond.

Worse yet, one-fifth of Bed Bath & Beyond's stores are located in states that have been hardest hit by the housing meltdown: California, Nevada, Florida, and Arizona. Even as it continues to expand its base of stores, these areas will serve as a drag on performance. It is the industry leader, but that industry is under a lot of pressure.

Yet some investors see a number of these trends actually helping the housewares retailer. CAPS member abgreenberg, for example, notes that a tough housing market might actually help the company: "With credit tight and housing collapsed, people will redecorate rather than move. With Linens and Things out of business, [Bed Bath & Beyond] is in ideal position to capitalize on this trend. Has done so in previous recessions."

Shine your starlight
Are these stocks shining brightly, or growing dimmer? 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 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?