Top-Rated Stocks Blowing the Doors Off This Market

No one has perfect foresight, but let's be honest: The market is full of people who, as Oscar Wilde would say, know "the price of everything and the value of nothing." Far too often -- over the past year especially -- investors have been pitched sensational stock recommendations, only to be left high and dry as shares crumble.

To hunt down top-recommended stocks that have been rewarding investors accordingly, I summoned our Motley Fool CAPS community to point out a few four- or five-star stocks that have been shootin' for the moon in recent months.

While they're not formal buy recommendations, these three-month bloomers caught my attention:

Data from Motley Fool CAPS and Yahoo! Finance as of May 28.

You can run the CAPS screen I used by clicking here. 

Still charging ahead
General Electric has been on one heckuva run in recent weeks. Even without the government-led stress test that has provided fuel to ignite financial shares, GE's stock has more than doubled since bottoming out in March. For a huge company, that's incredible.

And most of us know what's behind the rally: The market, scared witless of GE's finance arm, pushed shares down to levels that suggested something akin to failure. Now that the doomsday card is off the table, shares are adjusting back to rationality. And with shares still trading at a relatively scant valuation, assuming there's still room to run isn't a stretch.

The bullish argument goes something like this:

• The real worry, GE Capital, is actually quite sturdy. Compared with its peers, GE Capital is among the strongest financial institutions. This is especially true when you consider that it can receive contributions from its parent company (and has done so).
• The rest of GE is incredibly diverse and has brand-name dominance like almost no one else. Furthermore, energy ventures from President Obama's grand plans could prove exceptionally lucrative.
• Demand for its consumer items (like washers and dryers) could explode if and when pent-up demand prevails and retailers restock inventory.

Alas, this bullish argument seems to be a tired point. Today, I thought I'd give the bears a turn and see what the counterargument is here.

Among those betting against GE is CAPS All-Star ServusDei. In a recent post, ServusDei explained why GE might not be the value stock that others see:

1. Its recent dividend cut is an objective testimony to the financial instability of the company. Its dividend yield of 3.3% is now comparable to [Procter & Gamble (NYSE:PG) or Johnson & Johnson (NYSE:JNJ)], but [both] are much safer dividend paying stocks, with payout ratio 36% and 39%, respectively, and they have also steadily increased their dividend over the past 50 years.

2. Contrary to the CEO [Jeffrey] Immelt's reassurance about the company, I just don't see it weathering the recession very well. Just look at its financial statements. I calculated its gross profit margin (gross profit/revenue) over the past 5 years: 44.9% in 2004, 44.7% in 2005, 43% in 2006, 43% in 2007, then 39% in 2008, a steady but surely downward trend in profitability. Any company with profit margin less than 40% is in danger of losing its competitive advantage.

These are both legitimate points: GE's payout ability has surely weakened, and its glory days of profitability may be tarnished.

Yet both points deserve a rebuttal. First, those investing in GE at today's prices aren't looking for a dividend aristocrat. They're looking for a deeply mispriced stock with the potential for massive capital appreciation. Be that as it may, GE's 3% yield is still nothing to sneeze at, either.

Second, the headline number of its profit margins shouldn't be what's important. The point to consider is whether GE's future profitability is attractive in relation to its current share price. And I think it is. Through thick and thin, GE earned more than $17 billion last year, and should earn something like $10 billion this year. With a current market cap of $140 billion, you get an intriguing valuation, assuming GE can simply maintain its current profitability, let alone grow it.

Your turn to chime in
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