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 getting punished. If Warren Buffett's buying railroads, perhaps you should look there, too. Does Bill Miller think financial stocks are beaten down? Maybe investigating more closely will help improve your own results.

Over on Motley Fool CAPS, our top-rated All-Star players represent the best 20% of our 83,000 professional and novice investors. I'm looking amongst them for those who've chosen one- and two-star stocks to outperform the market. The majority of CAPS investors may consider these stocks losers, but if our ace contrarians think otherwise, these picks might be worth a look.

These five low-rated stocks recently got the nod from the cream of our CAPS investors.

Typically with this series, there's a low-rated stock that has also enjoyed a large one-year run-up in its stock price, and the combination of high valuations and low ratings leaves me cold. This week, our contestants are Hoku Scientific and Raser Technologies. Both companies have enjoyed significant share appreciation over the past year, undoubtedly from basking in the glow of the alternative-energy glare that such stocks have given off. Although Raser has inked a deal with Merrill Lynch (NYSE: MER) to finance its geothermal plants, there's still staying power that both of these low-rated stocks need to prove.

A National calamity
It's no secret that the widening morass of housing continues to serve as a drain on a number of sectors, from homebuilders and mortgage lenders to investment bankers and retailers. If they're not writing down -- or writing off -- the value of assets on their books, then they're suffering from consumers who no longer have their homes to use as personal piggybanks to dip into. Housing's decline is what worries the Federal Reserve that we'll fall face-first into a recession.

So it's not surprising to find both Standard Pacific and National City at the bottom of our list in terms of annual returns on their stocks. The builders and the lenders have borne the brunt of the change in the industry's fortunes. The regional banks, however, may just have better success at turning things around.

Despite slicing its dividend and winnowing its staff as rising delinquencies and declining values play havoc with its balance sheet, National City recently issued $1.25 billion in convertible debt, set at a conversion price 22.5% above its stock price at the time. That move might serve to shore up its financials for a while.

But CAPS investors are a tough sell on this one. More than half of them think the Motley Fool Income Investor recommendation will underperform the market, while two-thirds of the All-Stars don't see it as a good play right now. CAPS investor olenoides was worrying about the bank's exposure to subprime mortgages at the end of last year. "Large mortgage exposure especially to second mortgages which are proven to be the most risky of them all," olenoides wrote.

CAPS player Yodi13 agreed:"Too much exposure to subprime. Will dividend hold up?"

On the other hand, CAPS investor kmote thought the bank was still a well-run business and gave a year-end assessment on why the future was still favorable.

Growing on average 14% a year for the past 16 years, this well run commercial bank will out perform the market in the next 2 to 3 years. Current dividend yield is 9.9%. ... There certainly is a lot of financials to pick from today, but I think NCB's price per share represents "fire sale" prices.

National City has actually gained a bit in share price since then, but it's halved its dividend payment, and it's relying on its own loan officers rather than make any more loans through mortgage brokers. The company said low demand spurred that move, but it should also increase the quality of the loans the bank makes.

Finding value under rocks
So there you have it -- five low-rated laggards that have gotten endorsements from some of the best and brightest investors in the CAPS community. If you want to add your two cents on these or any other firms, sign up to join Motley Fool CAPS, absolutely free of charge.