These Cold Stocks Are Heating Up

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

Taking the market's temperature
But Motley Fool CAPS' proprietary ratings, aggregated from the opinions and accuracy of 180,000-plus members, offer a great way to monitor investor sentiment. Following a CAPS rating trend can help us determine the best time to invest. Let's look at previously low-rated companies that have recently enjoyed a bump in investor confidence to the top tiers and see whether they're truly heating up -- or headed back to the deep freeze.

Company

CAPS Rating (out of 5)

Recent Price

EPS Growth Next Year

ARMOUR Residential REIT (NYS: ARR) ****$6.96(7%)
Newcastle Investment (NYS: NCT) ****$4.90(59%)
United Parcel Service (NYS: UPS) ****$73.4713%

Source: Motley Fool CAPS; Yahoo! Finance.

Obviously, 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 we should too.

Caution: Contents may be hot
The housing industry offered up some conflicting news last week that would ultimately impact growth prospects for mortgage REITS like ARMOUR Residential REIT and American Capital Agency.

The National Association of Realtors 'fessed up they had been double-counting home sales for the past four years, so their numbers had to be revised downward 14%, indicating the market was not as strong (relatively speaking) as the real estate mouthpiece had been suggesting. On the other hand, new housing starts rose to their highest level in a year, jumping 9.3% in November, and perhaps marking the beginning of the turnaround for which the industry has been desperately waiting.

Not all REITs are created equal, with some like Annaly Capital Management (NYS: NLY) investing exclusively in agency-backed securities, meaning the taxpayer will backstop any losses, and hybrid types like Chimera Investment (NYS: CIM) , which invests in both agency and non-agency securities. Others still, like Invesco Mortgage Capital (NYS: IVR) and ARMOUR, take on enormous amounts of debt to juice their returns, using the leverage to make a profit on the difference in the spread between the cost of what they borrow and the return they make on their investments.

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.

CAPS member ballengerm likes ARMOUR's dividend, which currently yields 18.8%, at least until the Fed abandons its artificial low-rate policies.

Newcastle Investment is something of a different animal than those above because it also invests in commercial real estate, so it's not as tied to the housing market. Not that the CRE market is any great shakes; yet as Greenwichadvisor notes, most of Newcastle's investments are in non-recourse CDOs, making sifting through its financial statements more difficult.

It is hard to tell what the leverage is for NCT. They account for their investments where the write down all assets to market and report all debt at face value. During the financial crisis they wrote a lot of assets to zero to 10 cents. They cannot write a lot of this back up due to accounting. In addition, a majority of their assets are held in CDO's that are non recourse to NCT but they are required to consolidate them. Therefore, the balance sheet is of very limited use in understanding NCT.

Let us know in the comments section below which REITs are your favorite, the add ARMOUR and Newcastle to your watchlist to see which best profits from the current environment.

A painful realization
With the United States Postal Service facing a $14 billion deficit, it's not hard to see why investors might think United Parcel Service and FedEx (NYS: FDX) are good investments these days. Privatize the system and let the folks who efficiently and profitably do this sort of thing day in and day out run the mails just as well.

Moreover, comScore says online Christmas shopping is sizzling this year, up 15% from last year. While some retailers like Best Buy (NYS: BBY) were burdened by the explosion in cyber-shopping and unable to fill orders (and even cancelling some), both UPS and FedEx will be the beneficiary of all those dollars spent, as they'll be delivering the bulk of the packages to your doorstep.

CAPS member busterjde sees the two private delivery services winning from the post office's loss: "Americans will have to turn to companies like UPS and Fed Ex to pick up the slack left by the hefty cuts being made by the United States Postal Service."

Add UPS to the Fool's free portfolio tracker to keep track of its progress like a shipment from the North Pole, and let us know on the UPS CAPS page whether you think it will deliver the goods for investors.

Checking the mercury
Are these stocks invitingly warm or bitterly frosty? The Motley Fool has identified two stocks that are also facing difficult times yet still grow revenues hand over fist. The report is free, but it's available only for a short time, so ask for your copy today and find out the two cash kings that are changing the face of their industry.

At the time this article was published Fool contributorRich Dupreyowns shares of Best Buy, but he holds no other position in any company mentioned.Click hereto see his holdings and a short bio. The Motley Fool owns shares of FedEx, Chimera Investment, Best Buy, and Annaly Capital Management.Motley Fool newsletter serviceshave recommended buying shares of Annaly Capital Management and FedEx.Motley Fool newsletter serviceshave recommended writing covered calls in Best Buy. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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