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 bought Ingersoll-Rand when Warren Buffett announced his small stake in this industrial company last February, you'd be enjoying a roughly 23% gain so far. You'd be up another 50% 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 65,000 professional and novice investors alike have rated more than 5,000 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 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 receive ratings too, 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-star 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 run-up in its stock price, which leaves me leery of considering it as a possible investment. Sure, stocks can continue to run, but these picks' high valuations -- even with their low ratings -- leave me a little cold. Online financial services company China Finance Online, with its quintupled stock price, would fit the bill this week. Even General Motors, despite its far more sedate 28% increase and recent settlement with its union, might have run its course, considering the financial hurdles it still faces. Ford (NYSE:F), another financially weak car maker, is up next at the union's bargaining table.

Although two other stocks have been knocked way down over the past year, neither seems to inspire much confidence. Even Warren Buffett declines to invest in the airline industry, and the credit protection Radian offers to mortgage lenders might still have to wade through a deep trough on its way to recovery.

When we last looked at USANA in August, it was announcing a share repurchase program. It actually sported a quick cash conversion cycle -- as did rival Mannatech (NASDAQ:MTEX) -- thanks to an inventory-light business structure that has representatives paying for products up front.

CAPS player PapaKilo dismisses the negativity surrounding the multilevel-marketing industry, focusing instead on the products USANA offers:

Regardless of negative opinion, USANA still posts quarterly profit gains and to my understanding they did it for many quarters consecutively. The reason is just if you look at the product line, listed in the Physicians Desk Reference as pharmaceuticals proven to be manufactured and tested for integrity. This proves to me that they mean business no matter the type of distribution method!

Finding value under rocks
So there you have it: five low-rated laggards with 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. It's 100% free.