Rising stars: 5 nearly great stocks
Posted
Aug 19 2009, 01:47 PM
by
CAPS Editor
Rating:
This post comes from Rich Duprey at partner site The Motley Fool.
Some companies are obviously great investments -- in hindsight. Yet for every stock screaming "Buy me!" others simply give us a nudge and a nod.
How can we isolate tomorrow's great investments from the thousands of pretenders? At MSN CAPS, these opportunities are frequently found among four-star stocks.
Top-rated five-star stocks obviously have bullish consensus, but we've found that stocks moving up from three stars to four are likely being driven by "smart money." By getting in early, investors may be able to eke out a few extra percentage points of gain from these equities.
That's why it's worthwhile to sift through the CAPS database to find four-star companies that could be on the cusp of achieving a bullish consensus among investors.
Here is a handful of four-star stocks:
AT&T (T) is down 12% year to date. The nation's biggest provider of local and long-distance telephone service trades at a forward price-to-earnings ratio of 11 and has per-share earnings of $2.02.
Merck (MRK) is up 3% year to date. The drug maker trades at a forward price-to-earnings ratio of 9 and has per-share earnings of $2.70.
Monsanto (MON) is up 15% year to date. The supplier of herbicides, seeds and other agricultural products trades at a forward price-to-earnings ratio of 19 and has per-share earnings of $3.90. (See Jubak: Monsanto speaks out)
Nvidia (NVDA) is up 62% in 2009. The maker of chips used for computer graphics trades at a forward price-to-earnings ratio of 34 and has a per-share loss of 73 cents.
The U.S. Natural Gas (UNG) exchange-traded fund for the natural gas market is down 48% so far in 2009.
Some of these names might surprise you. AT&T is nearly great? Even familiar names can offer opportunities, and perhaps we've forgotten the potential they still hold.
Natural gas prices at 7-year low
Natural gas producers have lagged the broader market as the recession diminished demand for natural gas, used to generate about a quarter of the nation's electricity and heat more than half of U.S. homes. A glut of gas has driven the price to a seven-year low of $3.09 per million British thermal units, from more than $13 per million Btu last year.
As the economy improves and electricity use grows, you might want to put your money in a natural-gas play like Chesapeake Energy (CHK) or XTO Energy (XTO).
At this point, that's not what U.S. Natural Gas is all about, though. It's the world's largest commodities ETF that tracks the underlying basket of securities and futures contracts on natural gas.
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Futures pools like U.S. Natural Gas need to issue shares on a regular basis to track the underlying shares. The fund typically rolls over its positions every month as contracts expire.
But management has not issued new shares since July on concern that federal regulators will keep it from investing in natural gas. The fund is now more like a closed-end fund, and it has been trading at a huge premium to its net asset value.
The fund's managers said they won Securities and Exchange Commission approval to issue 1 billion new shares, which would allow the fund to nearly triple in size. But plans are on hold while the Commodity Futures Trading Commission investigates whether speculators are distorting prices for oil and natural gas. The CFTC is weighing whether to impose position limits or strict caps on how many contracts a trader can hold.
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It isn't clear whether the commission will ultimately initiate action that requires U.S. Natural Gas to alter its investment objectives; the agency plans to issue a report this month making the case for increased regulation of swaps dealers and index investors.
Citigroup says U.S. Natural Gas controls a quarter to one-third of all open-interest contracts on the Nymex and the Intercontinental Exchange, and is thereby creating abnormal demand and propping up prices.
With regulators considering new rules that would limit the size of positions that commodity funds can hold, U.S. Natural Gas opted to not issue shares that might push it over those limits and require management to divest the ETF's positions.
Fraught with danger for the average investor
In short, the fund is fraught with danger for the average investor, regardless of what the CFTC does. The risk, though, has nothing to do with natural gas as an investment and everything to do with the decisions regulators make in Washington.
Do investors understand the risks? Although 97% of the more than 1,250 CAPS members rating the natural gas ETF mark it to outperform, CAPS member "bladedog" argues that its current premium is untenable. Another CAPS participant, "herztical," seems to understand the situation and blogs that a more market-based approach would let things work out naturally. He remains a UNG bull.
"Finally, as with any asset class, the market will correct itself if it swings too much to one side or another," writes herztical. "If we can take anything away from last year's oil spike and subsequent collapse, it is that eventually true supply and demand will dictate price. . . . Besides, do we really need more government interference and regulation? I say let the market decide if it wants these ETFs around. If they don't prove themselves, well, there is no need to worry about regulating them because they won't be around for long."
Investor sentiment suggests that these four-star investments seem to be on their way to five-star greatness, but it pays to start your own research on these and any other stocks on 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.
Turn to member blogs for insight and opinion. And use the CAPS stock screener tool to find your own list of companies that satisfy your investment criteria. Sign up today for the completely free service, and let us hear what you have to say about the great -- and nearly great -- companies that interest you.
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