3 Stocks Approaching Greatness

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For every stock out there screaming, "buy me," there is another simply giving us a nudge and a nod. While all the attention might be focused on their five-star peers, we can sift through Motley Fool CAPS to find four-star stocks giving us the "high sign" they're approaching greatness. 

These opportunities -- including familiar names and beaten-down companies -- rank higher than most of the other 5,400 starred companies, and it pays to investigate their potential. For consideration today, I've got this handful of stocks on the way to fame.

  • ARMOUR Residential REIT (NYS: ARR)
  • Frontline (NYS: FRO)
  • Insmed (NAS: INSM)

The 180,000-plus CAPS members have chosen these companies as less obvious sources for tomorrow's great buys, so let's see why they might merit your attention.

In the sight of greatness?
Even mortgage REITs that invest in agency securities may come under greater pressure as the yield curve collapses and the spread decreases with it. mREITs make their money investing on the difference between short and long term rates (the spread), borrowing low-cost short-term money and investing it long term for higher returns.

mREITs investing in agency-backed securities -- investments underwritten by the taxpayer via Fannie Mae, Freddie Mac, and Ginnie Mae, for example -- typically have a leg up on those that invest in non-agency-backed securities simply because if the investments go bad, you and I will be picking up the tab. So investors in ARMOUR Residential REIT and American Capital Agency (NAS: AGNC) run a lower risk than those in, say, Chimera Investment (NYS: CIM) .

But low risk is not no risk, since ARMOUR, Newcastle Investment (NYS: NCT) , and others also deploy leverage to juice their returns. They borrow money to make money, thus exposing themselves to a greater degree to any narrowing of the spread. As economic crises spread across Europe, protracted joblessness remains entrenched here, and malaise everywhere is a concern, a further collapse of the yield curve or spread is likely to impact such leveraged mREITs more acutely. Still with the government backstop, risks remain low.

Which may be why ARMOUR, with dividend yields just under 20%, might provide one of the best opportunities for dividend investors as it pays out to investors on a monthly basis. It could be why all 22 CAPS All-Stars rating ARMOUR think it will outperform the broad market averages. You can build a case for growth on the ARMOUR Residential REIT CAPS page or add it to your watchlist.

Stormy seas
When waves are pushing your boat back, turning into a wave can help keep it from capsizing. The world's largest independent oil tanker operator, Frontline, ran full steam ahead into the rogue wave of a tanker glut that threatens to capsize the industry. Second quarter operating losses totaled $1 million compared to a $118 million profit a year ago, as day rates continued to fall below break-even levels. Teekay ran into similar squalls, losing less than last year but still down $96 million.

There's been no let up in the tumult caused by the shipbuilding boom of a few years ago, and with ultra-slow steaming not helping stem the collapse in rates, Frontline says it is going to resort to pulling tonnage from the market.

It expects the rest of the year to look bleak as well, but the dire conditions could lead to industry consolidation. With other shippers not as resilient as Frontline has been, it might stand to gain the upper hand in any M&A activity that were to occur, though with just $173 million in cash on hand, it might be hard-pressed to be a buyer. Still 95% of CAPS members rating Frontline see it outperforming the broad indexes.

Follow the rising tide all Frontline developments by adding its stock to the Fool's free portfolio tracker.

Smelling a rat
After the FDA forced Insmed to put on hold its lung-infection therapy Arikace until it could examine more closely how it affects rats, the biotech indicated that it's looking forward to getting its trials back on track sometime during the fourth quarter of this year. Insmed said that after it reviewed the data it's fully confident it will be able to start up testing again.

So are the analysts at Wedbush Morgan who rated the stock to outperform after listening to management speak at the conference. That was the same conference where investors had bid the shares up 30% higher just on the announcement Insmed would be making a presentation there, but the analysts came away with the belief the FDA would lift the hold it imposed on the biotech.

Pitting Arikace against the inhaled tobramycin treatment Tobi from Novartis (NYS: NVS) , a twice-a-day therapy for cystic fibrosis, has Insmed's once-a-day Arikace comparing favorably. With a potential $1 billion addressable market, Arikace could make Insmed a leading contender in the space.

Considering 83% of the CAPS members rating Insmed agree it will beat the Street, you can let us know on the Insmed CAPS page what you think the FDA's outcome will be.

A great opportunity for you
Investor sentiment suggests these four-star investments still seem to be on their way to five-star greatness, but it pays to start your own 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.

Sign up today for the completely free service and let us hear what you have to say about the great, and almost great, companies that interest you.

At the time this article was published Fool contributor Rich Duprey holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Chimera Investment. Motley Fool newsletter services have recommended buying shares of Novartis. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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