5 stocks turning a corner

The collective wisdom of an online community is tapped to identify out-of-favor companies that are starting to command respect.

By Caps Editor Mar 17, 2010 5:27PM

By Rich Duprey, The Motley Fool

 

When a stock's share price is lower than a North Dakota thermometer in winter, 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.

 

But MSN CAPS' proprietary ratings, aggregated from the experience and knowledge of 160,000-plus participants, offer a great way to monitor investor sentiment. Tracking a CAPS rating trend is one way investors can determine the best time to buy a stock.

Let's look at a handful of companies that not long ago had paltry one- or two-star ratings at CAPS but as of last week had been bumped up to three stars as investors warmed to their prospects.

 

Rite Aid (RAD) operates more than 4,800 drug stores in 30 states and the District of Columbia. A year ago, the stock traded at 24 cents and investors speculated that the Camp Hill, Pa., company might file for bankruptcy. Today, some on Wall Street are lauding management for moves that could make Rite Aid a takeover target. 

 

Rosetta Stone (RST) offers software that helps people learn to speak new languages. The Arlington, Va., company, which went public in April, said fourth-quarter profits more than doubled on strong demand from individuals and institutions.

 

True Religion Apparel (TRLG) sells jeans, skirts, jackets and other apparel in about 50 countries through upscale retailers and boutiques. Some analysts are bullish on the Vernon, Calif., company's plan to expand the number of its own stores, from 70 to about 97, by year's end.   

 

Hartford Financial Services Group (HIG) provides insurance to individuals and businesses. The Hartford, Conn., company took $4.4 billion in TARP funds last summer and raised $700 million by selling new common stock. It needed capital to support its variable annuities business, a growth area over the past decade that also made the company vulnerable to downturns in the stock market, as many of annuities contain stock-market guarantees.

 

China Automotive Systems (CAAS) supplies power-steering systems and components to more than 60 vehicle manufacturers in China, the world's biggest auto market. Boosted by government's policy incentives, passenger car sales in China soared 53% last year to 10.3 million units.

 

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 you should, too. 

 

Caution: Contents may be hot

Hartford Financial last month said it swung back to profitability in the fourth quarter and posted a smaller full-year loss as both its life and property and casualty businesses reported net income. But the report might not have given investors much confidence that the company has a brighter future.

 

While Hartford managed to beat expectations and give decent guidance, it also said that financial turmoil increases the likelihood that it's going to get it wrong no matter what. So you might want to take what they're saying with a bit of caution. 

 

That's what "yesterdaysnews" is doing. The CAPS member recently said that the time to have bought Hartford was last year, when shares were trading at $3.33. The stock is up more than 300% in the rally that began last March. 


"Yesterdaysnews" offered another reason for skepticism: "(Hartford) just hired a top executive from American International Group (AIG). Not only has he been part of an organization that you are going to be financing for the rest of your life, you probably will let him reduce your portfolio value -- silly you."  

 

A cure for what ails you

It might not be Rite Aid's recent improvements that have shareholders thinking twice about exiting the nation's third-largest pharmacy chain. No. 1 Walgreen's (WAG) recent acquisition of privately held rival Duane Reade has CAPS member "baileymadison" speculating that Rite Aid may now be a target.

 

"Watch them get bought, or some of the stores," "baileymadison" recently wrote. "Walgreen, CVS Caremark (CVS) or even Wal-Mart (WMT) will be in the hunt."

No. 2 CVS Caremark might be the stronger bet, as a deal would provide it with an easy way to expand its footprint and close the gap on Walgreen.

 

Building a support structure

CAPS member "glenninn" believes the auto industry is going to continue to move its supply chain to countries where costs are lower, which will ultimately benefit China Automotive Systems.

 

"As (China Automotive's) business grows, it will benefit from improving manufacturing quality and experience," "glenninn" wrote. "This should provide all upside for the near future, barring any unforeseen management mistakes."

 

Yet China ought to have no problem generating sufficient demand on its own. According to the China Association of Automobile Manufacturers, vehicle sales jumped 124% in January from the year-earlier period, while Chinese output soared 143%. The association expects production to hit 15 million vehicles in 2010. China Automotive should be able to supply plenty of systems and components without needing to look to the United States for business.

 

Check the mercury

Are these stocks invitingly warm or bitterly frosty? Log on to CAPS and let us know what you think. Your opinion makes a difference.

 

The ratings and comments from CAPS members aren't always on the money, but there's value in a system that incorporates the knowledge, information and skills of thousands of participants.  As wisdom-of-the-crowd experiments show, collective estimates are often superior to the estimates of individuals.

 

More articles from The Motley Fool:

 

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