5 Stocks of 5 Skeptics

When it comes to investing in the stock market, it pays to be skeptical. Not only should you not believe everything the analysts tell you, but you often have to discount what the companies are telling you, too.

Going against the crowd can pay off handsomely. Some of the market's legendary investors have been contrarians: Benjamin Graham, Warren Buffett, John Neff, and Marty Whitman, to name just a few. Like baseball's greatest place hitter, "Wee Willie" Keeler, contrarians "hit 'em where they ain't."

When the crowd abhors a stock, a contrarian wants to look more closely at it. Similarly, when the masses crowd into one, the skeptical thinker believes it's time to move on.

A new breed of contrarian
Harnessing the power of more than 23,000 professional and novice investors alike, Motley Fool CAPS rates thousands of stocks on their potential. Not only are the stocks rated, but the players are, too. The best and most accurate of the bunch then have their opinions overweighted when it comes to assigning stock ratings. In that way, we just might be able to find the best stocks to invest in. Or in the case of contrarians and skeptics, the worst to avoid.

Today I'm looking at a new breed of contrarian, the CAPS "skeptic." Skeptics don't think like most investors. They're willing to see the downside potential of a stock, as well as the upside. CAPS skeptics have rated more stocks as underperforming the market than outperforming it. They're contrarian in that they find more downside potential than upside, but being a top-rated CAPS player means they're right far more often than not.

Here are some recent "underperform" picks from five of the top CAPS skeptics:

The stocks above are not automatic shorts. Just as a list of their best stocks would not be a list of stocks to buy, this list of least favorites requires a little more thinking and drilling down into the financial statements than that.

But it's a place to start. For example, urological and health-disorder products maker Auxilium was upgraded by at least one analyst from a sell rating to hold because it posted a smaller quarterly loss that than analysts had forecast. While we'll leave aside for now the question of how you're supposed to hold stocks you've already sold, Auxilium has never posted a profit, and it expects to report a loss of $40 million to $44 million in 2007. It could be on the verge of a breakthrough drug -- its topical testosterone gel might just prove a winner -- but then again, maybe not.

Similarly, MRU, which stands for MyRichUncle, a private student loan company, just reported operating revenues considerably exceeding last year's results, and interest income on its student loan portfolios that was more than 700% greater than the year-ago period. Only two analysts cover MRU, but both rate it a buy. Is this an up-and-coming player able to challenge the likes of Sallie Mae parent SLM (NYSE:SLM) or Nelnet (NYSE:NNI), or a flash in the pan?

Seeing past the obvious
Contrarians try to see past the headlines. They know that just beyond the green grass and blue skies lies a land of storm and calamity. Conversely, no storm lasts forever, though the crowds may think the gloom goes on and on, so next time, we'll take a look at the CAPS skeptics outperforming picks.

In the meantime, drop by CAPS and tell us which stocks are your favorite contrarian picks.

Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.