Surprising Low-Rated Stocks the Leaders Love

Piggybacking on the picks of great investors and money managers can often lead to big rewards -- especially when the stocks in question are beaten down.

If you'd followed the lead of David Dreman, of Dreman Value Management, and bought into the aerospace and industrial products manufacturer Barnes Group at the end of March, you'd be up about 25%. Meanwhile, copying the value investing movements of Warren Buffett has been proven to beat the market.

Over on Motley Fool CAPS, more than 78,000 professional and novice investors alike have rated more than 5,300 stocks, indicating whether they think those companies will beat the market or lose to it. The best investors, those who consistently outperform their peers, are considered All-Stars. They might not match Buffett, Lynch, or Dreman yet, but their records are remarkable all the same.

The best of the best
All-Stars each boast a CAPS rating of 80 or higher (out of 100). That's plenty good, but I wanted to see which companies the very best All-Stars were choosing. I searched CAPS for players with a rating of 90 or better. Then I searched through this set of players to see who'd chosen one- and two-star stocks to outperform the market.

Why low-rated stocks? Just like the players, stocks are rated too, from one to five stars. Most CAPS investors may think these stocks are dogs, but our top All-Stars believe differently. It's a typical contrarian investor concept -- what value investing legend Benjamin Graham called "picking up cigar butts."

These five low-rated stocks have gotten the nod from the cream of our CAPS All-Stars:

Typically, there's a low-rated stock that's also enjoyed a large one-year runup in its stock price that leaves me leery of considering it as a possible investment. Not that stocks can't continue to run, but their high valuations -- combined with their low ratings -- leave me a little cold.

This week Rigel Pharmaceuticals happens to be that stock. Virtually all of its price appreciation came last week as it reported positive clinical trial results for its rheumatoid arthritis treatment. It's given back a little of those monster gains, and may yet give back more as the euphoria wears off.

A crowning achievement
While solar energy has been getting all the attention lately, other renewable energy sources have also had the wind at their backs. Such is the case with tiny Capstone Technology, a manufacturer of microturbines that operate on a variety of gaseous or liquid fuels and emit very low emissions. It recently unveiled the first megawatt microturbine. The company claims that each installation of its solution is the emissions-reducing equivalent of removing up to 700 cars from the nation's highways.

Although a number of top-ranked CAPS investors feel this could be a case of investors piling into a company because of its relationship with "alternative energy," bulls here feel its technology can actually assist and proliferate.

CAPS investor laservisor noted last year that alternative fuels will be driving ahead and Capstone can benefit from them:

The next revolution in energy will come from biomass based resources. Ethanol is what most people think of when they think biomass energy, but there are two very important other fuels: biogas (CH4+CO2) and producer gas (CO, H2, etc). These fuels can be produced at the community and "district" scale from ag waste, municipal urban waste, and so on -- and there are literally hundreds of thousands of sites around the world where small decentralized units of energy production from biomass can be commercialized.

Capstone is extremely well poised to be the leading technology driver for this revolution because of its scale, modularity, and proven reliability over the years.

Further, even though some CAPS All-Stars, like luvb2b with a perfect 100.00 player rating, see it as a short-term play, they also note the company has good fundamentals and some growth drivers poised to give it a boost:

CPST has a lot of the characteristics needed to make it a good January Effect candidate:

1. Recent fundamental news including incentives by NYC to promote use of microturbines.
2. Breaking out to a 52wk high.
3. Part of the hot alternative energy sector.
4. A play on increased energy efficiency.
5. Low price, historically volatile price action, low market capitalization, and high short interest.

Finding value under rocks
So there you have it, five low-rated laggards that have gotten big endorsements from some of the best and brightest investors in the CAPS community. What do you have to say? If you want to add your two cents, sign up to join the Motley Fool CAPS community, which is 100% free.