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There always will be companies that are obviously great investments -- in hindsight.
Looking in the rearview mirror, we can see we should have bought Starbucks (SBUX, news, msgs) at its initial public offering and realized 1,000%-plus returns over the years.
Yet for every stock out there screaming "buy me," others simply give us a nudge in the ribs and a knowing nod. They may be tomorrow's obviously great investments, but how do we tell them from the thousands of pretenders?
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Over on our CAPS investor-intelligence site, we know these opportunities as four-star stocks, companies that rank higher than most of the other 5,000 stocks in the CAPS universe but are just shy of achieving stardom. In the long shadows of stocks that garner the coveted five-star rating are top-tier companies approaching greatness.
While the full "secret sauce" of the way ratings are calculated is proprietary, three factors influence a stock's star rating:
- Whether it's rated "outperform" or "underperform."
- The length of time it is expected to perform (a few months or a few years).
- The ratings of the investors who make the picks.
Every investor is rated just as every stock is rated. The best and brightest of these players are considered All-Stars. Because they are correct more consistently than their peers, their opinions weigh more heavily in favor of (or against) a stock.
So while all the attention might be focused on the five-star stocks, good four-star investments slip under the radar. A recent sift through the CAPS database in search of worthy companies approaching greatness uncovered five names:
| Company | Industry | Market cap | Forward price-to-earnings ratio |
|---|---|---|---|
Pharmaceuticals | $90 billion | 20.8 | |
Agricultural products | $24 billion | 14.5 | |
Shipping | $1 billion | 14.2 | |
Biotechnology | $455 million | -20.9 | |
Application software | $1.2 billion | 53.4 |
You might find some of these names surprising. Drug maker Abbott Laboratories (ABT, news, msgs), for example, isn't exactly a hidden corporate name, particularly if you have rheumatoid arthritis and take its Humira for relief. But sometimes the most familiar names can mean some of the best investment opportunities, simply because we have forgotten about the potential they still hold.
Just as meaningful, the 76,000 investors on CAPS are giving these companies the nod as less obvious places to look for tomorrow's great buys. So let's delve a little deeper into why one of these companies might merit your attention.
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Yet sales of psoriasis drug Raptiva increased 37% in the third quarter. XOMA markets the drug in collaboration with biotech giant Genentech (DNA, news, msgs). And sales of Lucentis, a treatment for age-related macular degeneration, doubled in the period. XOMA markets the drug with Genentech and Novartis (NVS, news, msgs).
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Equally impressive is that drug companies such as Schering-Plough (SGP, news, msgs) have decided to expand collaborations with XOMA, which seems to underscore the validity of the Berkeley, Calif., company's R&D program.
It's the expanded deals that have CAPS investors like "Stormstocker" seeing the stock's potential to outperform.
Stock Chart (Year)
XOMA
New opportunities, expanded agreements and newly profitable -- XOMA might just be ready to zoom.
That's the bullish word on XOMA, but do you agree? Are these four-star stocks still investment-grade material? You can offer your input on CAPS. Your views can ultimately influence how the stocks are rated. Your opinion counts.
This article was reported and written by Rich Duprey for The Motley Fool. At the time of publication, he owned none of the stocks mentioned.
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