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3

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 Buffett's buying railroads, perhaps you should look there, too. Does Bill Miller think financial stocks are beaten down? Maybe investigating more closely will help improve your own results.

Over on Motley Fool CAPS, our All-Star players represent the best 20% of our more than 92,000 professional and novice investors. I'm looking amongst them for those who've chosen one- and two-star stocks to outperform the market. The majority of CAPS investors may consider these stocks losers, but if our ace contrarians think otherwise, these picks might be worth a look.

Here are a few stocks that have gotten the nod from the cream of our CAPS investors:

Company

CAPS Rating (Out of 5)

1-Year Return

CAPS All-Star

Player Rating

Equinix (Nasdaq: EQIX  )

*

(28.0%)

ethomps

94.56

Flagstar Bancorp (NYSE: FBC  )

*

(37.8%)

IBDFool4U

94.07

American Woodmark (Nasdaq: AMWD  )

*

(41.8%)

TMFMmbop

98.54

Brookfield Homes (NYSE: BHS  )

*

(48.8%)

caseykimma

93.40

Applied Energetics (Nasdaq: AERG  )

*

(64.0%)

goldminingXpert

99.22

Typically, there's a low-rated stock that has also enjoyed a large one-year run-up in its stock price, leaving me leery. Sure, stocks can continue to run, but in that situation, their high valuations -- and low ratings -- leave me cold. Not so this week, as all of these new-found objects of desire have fallen hard over the past year.

Expending energy for naught?
Using lasers for military applications is nothing new, but raygun maker Applied Energetics -- until only recently known as Ionatron -- has been having a rough go of being profitable at it. The net loss for last year was reduced to $14 million only as a result of cutting back on research and development expenses and increasing the interest the company earned. Little, it seems, has had to do with actually selling more laser products.

Undoubtedly it's a speculative play, and like Blanche DuBois, Applied Energetics relies on the kindness of strangers for its success. Almost all of its revenue comes from government contracts -- 98% at last count -- which means it relies on the whims of the day in defense spending.

Yet even as fantastical as this company's technology may seem (even CAPS bulls like Rep07 admit Applied Energetics is a speculative stock, though it has "awesome Star-Wars-like" weaponry), a previously unidentified mystery customer turned out to be the Navy, which last December received its laser-induced plasma channel (LIPC) demonstration system. That was a contract valued at nearly $10 million. With about $6.7 million in backlog to be completed over the coming year, it could be why some investors see its potential, the way WallStreetWolf did last October.

Has the backing of some solid hedge fund investors and an interesting technology. Balance sheet has them safe for the near future too. A lot of upside especially if [TASER (Nasdaq: TASR  ) ] can continue to do well, could help pull IOTN.

Whatever the future holds, it can't be denied that Applied Energetics' recent past has done little to inspire confidence. This has led many investors like CAPS player rofin to rate it as an "underperform," as he did in February:

Company has a poor track record since inception and shares have dropped 50% in last 12 months. The senior management has poor track record prior to joining Ionatron and continue to follow their spend -- spend -- spend management style. Company continues to post losses on speculative technology. High probability government funding for these projects will not be renewed.

Finding value under rocks
So there you have it -- five low-rated laggards that have received big endorsements from some of the best and brightest investors in the CAPS community, although there are always some who are not so sure. If you want to add your two cents on these or any other companies, sign up to join Motley Fool CAPS, absolutely free.


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Rich Duprey
TMFCop

Rich has been a Fool since 1998 and writing for the site since 2004. After 20 years of patrolling the mean streets of suburbia, he hung up his badge and gun to take up a pen full time.

Having made the streets safe for Truth, Justice and Krispy Kreme donuts, he now patrols the markets looking for companies he can lock up as long-term holdings in a portfolio. So follow me on Facebook and Twitter for the most important industry news in retail and consumer products and other great stories.

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