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 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.

Annaly Capital Management (NYS: NLY) ****$16.247%
Vertex Pharmaceuticals (NAS: VRTX) ****$40.782%

Source: Motley Fool CAPS; NM = not meaningful.

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
As I noted yesterday in reference to Agency Capital Management, this looks like the beginning of the end for the bull run of agency mortgage REITs like Annaly Capital Management, Chimera Investment (NYS: CIM) , and CYS Investments.

Mortgage Bankers Association application data confirm applications are still falling. Though fewer mortgage prepayments may ease the impact, the market remains a shambles. Without volume, new securitizations of agency-guaranteed residential MBS will be scarce.

Even the mREITs themselves see the party ending. Annaly just cut its dividend once again and we'll likely see others join the parade in revising their profit outlook downward. It may be one of the best-run agency REITs out there, but that quality yardstick is getting shorter. Of course, to its benefit, Annaly has also been steadily reducing its leverage (down to 5.4 from 5.5) so it has slightly lessened the risk of higher interest rates, but that doesn't mean it's a buyer's market.

I've marked Annaly to underperform on CAPS, but I'm in the distinct minority; more than 2,600 members have weighed in and 91% believe it will continue to outperform the broad indexes. Searauber, though, correctly said its dividend payout ratio was unsustainable and is looking for it to lag.

Tell me in the comments section below or on the Annaly Capital Management CAPS page your views on mREITs, then add Annaly to your watchlist to see how it handles the new mortgage landscape.

Handsome is as handsome does
The proof is in the doing, and Vertex Pharmaceuticals is proving that its hepatitis C therapy Incivek has done what it was asked to: Fourth-quarter sales were $456 million (up from $420 million the quarter before) and allowed Vertex to begin operating as a cash-flow-positive company.

Vertex has full North American rights for Incivek and has partnered with Johnson & Johnson subsidiary Janssen Pharmaceuticals for distribution in Europe and Mitsubishi in Japan. It's got a big head start on all the other players that suddenly piled into the niche at the end of last year. Roche bought Anadys, Gilead Sciences (NAS: GILD) purchased Pharmasset, and Bristol-Myers Squibb (NYS: BMY) bought Inhibitex. Suddenly everyone wanted in on the hep C market.

With more studies of Incivek under way, pairing it with therapies from Gilead and Bristol-Myers, and positive results so far, it's likely even greater developments will be coming Vertex's way. CAPS member ravens9111 thinks the market misstated the potential of its rivals and underplayed Vertex's own strengths:

What the market did not recognize is that VRTX has their own interferon-free drug in Phase II trials with results just released. The results were very positive. Analysts' forecasts of competitors bringing new product to market is an overreaction as 2014 may be the earliest they are approved. By then, VRTX will have their own approved through VX-2222.

Add Vertex Pharmaceuticals to the Fool's free portfolio tracker to be alerted to the next developments arising out of its labs.

Checking the mercury
Are these stocks invitingly warm or bitterly frosty? The Motley Fool has identified rock-solid investments to help you secure your financial future. The report is free, but it's available only for a short time, so ask for your copy today and find out which dividend-paying stocks made the cut.

At the time this article was published Fool contributorRich Dupreyholds no position in any company mentioned.Click hereto see his holdings and a short bio. The Motley Fool owns shares of Annaly Capital Management and Johnson & Johnson.Motley Fool newsletter serviceshave recommended buying shares of Annaly Capital Management, Johnson & Johnson, Gilead Sciences, and Vertex Pharmaceuticals.Motley Fool newsletter serviceshave recommended creating a diagonal call position in Johnson & Johnson. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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