Surprising Low-Rated Stocks 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 bought Ingersoll-Rand when Warren Buffett announced his small stake in this industrial company last February, you'd be enjoying a roughly 28% gain so far. You'd be up another 43% if you'd followed David Dreman of Dreman Value Management into aerospace and industrial products manufacturer Barnes Group at the end of March.

Over on Motley Fool CAPS, more than 60,000 professional and novice investors have rated more than 4,900 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, Peter 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 more. 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 95% 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 receive ratings, from one to five stars. The majority of CAPS investors may think these stocks are dogs, but our top All-Stars believe they'll have their day. It's a typical contrarian investor concept -- what value investing legend Benjamin Graham called "picking up cigar butts."

These four one- and two-star stocks have gotten the nod from the cream of our CAPS All-Stars:

As in past weeks, there is usually a low-rated stock with a large one-year run-up that leaves me leery of considering it as a possible investment. Not that stocks can't continue to run, but their high valuations -- with their low ratings -- leaves me a little cold. This week's big mover is Charter Communications, which is up nearly 108% over the past year. Short-sellers have been on the attack in recent months, perhaps as overblown discussions of a possible buyout have swirled around the company. The CEO had to dampen such thoughts during the recent conference call, saying that if anyone would be a buyer, it would be Charter.

Finding value under rocks
For my tastes, despite having the biggest price decline of the group, Mannatech's business model -- multilevel marketing -- leaves an unpleasant taste in my mouth. And I have to agree with Warren Buffett about being skeptical of one's ability to make money investing in airlines.

Which leaves us with big, bad Microsoft, the software king that everyone loves to hate. However, whatever we may think of the company's operating systems, we're investors and need to put personal prejudices aside when considering a company's merits. In that regard, and in spite of a near 20% increase in stock price, the Motley Fool Inside Value selection may just be the one to watch here.

It's true that the new Vista operating system has rolled out a bit slower than analysts anticipated (although Microsoft touts the tens of millions of copies sold as a success). Yet computer users will end up migrating to Vista as it is installed on new computers, so sales that may be lagging now should grow. It's also been the purveyor of a buggy game console that is just as liable to go belly-up as take you to new gaming heights. Fortunately, the rival PlayStation 3 console from Sony (NYSE:SNE) has its own host of issues, which gives Microsoft time to fix its system.

It's the forced adoption of Vista that has the author of the top bull pitch, leobourne, convinced the company will outperform the market in the years ahead:

Whether people like it or not, sooner or later they will have to move to the Vista operating system. These days, having multiple operating systems on one computer is clunky.  ... I think the big surge of new orders will start in the holiday season at the end of 2007. Once an expanding number of people get new computers with Vista and learn its advantages (assuming there are any), then other people will want it. These days it doesn't pay to upgrade a computer. It's nearly as cheap to buy a new one, and that's what people without Vista will do.

CAPS investorChadtor agrees that Vista will be a big plus for the software maker, but thinks the gaming side will also play a role; a new release of its huge Halo franchise will drive further revenues for the company. Chadtor says, "... also watch out for HALO 3, this video game made by Microsoft will (exceed) well over 100 million in revenue in just the first few days in stores. Halo 3 is expected to be released this September."

It's your turn
So there you have it, four low-rated laggards that have gotten a big endorsement from some of the best and brightest investors in the CAPS community. What do you have to say? Will Microsoft survive the bugs -- of its software and its game console? If you want to add your two cents, sign up to join the Motley Fool CAPS community. There is no admission charge and you can wear any type of cap you want.

Microsoft is a recommendation of Motley Fool Inside Value. You can obtain a 30-day risk-free trial subscription by clicking here.