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 20% gain so far. You'd be up 35% 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 77,000 professional and novice investors alike have looked at more than 5,200 stocks and indicated 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 star (low) to five (high). The majority of CAPS investors may think the one- and two-star 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 low-rated stocks have gotten the nod from the cream of our CAPS All-Stars:

Typically, when I make this list, I find a low-rated stock that's also enjoyed 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 high valuations -- even with low ratings -- leaves me a little cold. This week is different in that we have two stocks sporting monster gains over the past year.

Deckers happens to be especially galling, since I sold my shares in the company about a year and a half ago, when I believed that Uggs were a fashion fad doomed to fade and that Teva sandals had lost their luster. How wrong I was! Even with knockoffs readily available, the Uggs brand shows surprising resilience, and sales and profits -- not to mention the company's shares -- keep right on growing. This is too painful. Let's move on.

In the Palm of your hand
The Treo mobile phone has enjoyed lots of success, even as it struggles to compete against Apple's (NASDAQ:AAPL) iPhone and Research In Motion's (NASDAQ:RIMM) BlackBerry. Palm, however, was supposed to introduce a successor smartphone, but recently announced that it will miss its delivery date and post lower profits. That news worried the market, which took down Palm's shares to a point at which some CAPS investors find it too cheap to pass up.

CAPS All-Star mindmuse, with a 96.11 player rating, believes that at these prices, Palm may very well make a takeover candidate:

Gawd! what a dreadful company. But not to shabby a product with a sizable installed base that works on all the carriers. A market cap of a measly 667M with 627M in cash and zero debt - what??!! $15 in annual revenue per $6 share?

I don't know why somebody hasn't bought it yet (probably that overwhelming odor of decay...), but this would be a really cheap Christmas present for somebody. Say a reinvigorated Dell, Nokia or Motorola. [To Google,] chump change. Even a carrier. It's just gone too cheap now -- somebody's gonna buy it and clean up this pig.

On the other side of the coin sit other All-Stars, including Jeffreyw, who simply see Palm as continuing to lose market share while other rivals gain. "Everyone who wants one, has one. Too many other choices now compete with PALM," says Jeffreyw. "They will continue to lose market share.

Finding value under rocks
So there you have it -- five low-rated laggards that have gotten an endorsement from some of the best and brightest investors in the CAPS community. What do you say? If you want to add your two cents, sign up to join the Motley Fool CAPS community, which is 100% free.