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 25% gain so far. You'd be up another 40% 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 alike 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, 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 five 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 that has had a large one-year run-up 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 -- and their low ratings -- leave me a little cold. This week's big mover is Dryships, which is up 440% over the past year. Sound familiar? For readers of this column, it was picked back in July by CAPS All-Star fullwealth when it was nearly 13% lower in price. Shrewd pick for him, so let's see how well JohnnyLC does with it.

Another stock that makes a second appearance is mortgage lender Countrywide Finance. Selected two months ago, it hasn't fared as well, dropping an additional 38% since then as the subprime mortgage crisis has worsened. Has it dropped as far as it will, now that the government is crafting an aid package for borrowers?

Finding value under rocks
Surprisingly, there's actually a company that's performed worse than Countrywide: Medis Technologies, which develops liquid fuel cell technology for mobile handsets and portable consumer devices. Yet it has behaved more like a penny stock company, over-hyping deals with press releases while finding it difficult to cement real deals. A supposed major collaboration earlier this year with Microsoft (NASDAQ:MSFT) turned out to be nothing more than puffery. Micro fuel cell technology looks more difficult to achieve than proponents have suggested, meaning it seems like a tough call to pick this stock to succeed.

Between the remaining contenders Ciena and Sony, I find myself siding with those who see the consumer electronics manufacturer registering outperformance, and not because it has appreciated far less than the optical equipment maker. Not that Ciena can't win too, considering customers like Verizon (NYSE:VZ) will need to keep expanding their offerings to meet demand. Ciena just beat earnings this week, but its earnings miss earlier this year still highlights growing competition in the industry, which may ultimately topple the company's stock price.

Sony, too, has had its share of troubles, particularly as Nintendo's Wii grabbed the lion's share of game console sales and several studios have opted to back HD-DVD over Sony's preferred Blu-Ray. Yet the company looks like it has seen what ails it and is taking the proper medicine. The PS3 console is still a strong product, Sony has wisely decided to disconnect its proprietary digital media service, and it is considering launching a video download service. Even if the venture doesn't work out, it sounds like the more innovative company that we remember Sony being.

That innovation bloodline seems to have persuaded CAPS player AwesomeIndex to put it in his portfolio. "Sony has a long history of awesome products in electronics, movies, music, and games. Sony gets the nod into the Awesome Index."

Technology is what joemommasan hopes keeps Sony going. Taking on the popular iPhone is no small task, even for Sony, as we saw what happened when it tried to unseat iTunes. "There is some news that their version of the iphone will be much better, but hopefully, due to their tardiness, haven't missed the boat yet again."

Still, there are some compelling arguments being made on CAPS from investors who think Sony won't be breaking the mold again any time soon. All-Star investor TomFrog, for example, mourns what could have been, but doesn't see it changing. "Sony has squandered their mindshare on the personal music front without replacing it with anything else. Sony needs to make up their collective mind which market to go after and relentlessly sell off everything else -- I don't see that happening."

It's your turn
So there you have it, five 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 Sony soon re-emerge or are its best years behind it? If you want to add your two cents, sign up to join the Motley Fool CAPS community, which is 100% free.