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.

On Motley Fool CAPS, our top-rated All-Star players represent the best 20% of our more than 94,000 professional and novice investors. I'm looking among them for those who've chosen one- and two-star stocks to outperform the market. Most CAPS investors might 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

Pulte Homes (NYSE: PHM  )

*

(44.4%)

baylesparty1

99.53

USANA Health Sciences 

*

(53.0%)

fredericch

93.70

Fortress Investment Group (NYSE: FIG  )

**

(54.8%)

stockcontest

94.81

Ultrashort Oil & Gas Shares (AMEX: DUG  )

**

(38.6%)

gparent2008

98.24

PMI Group (NYSE: PMI  )

*

(87.0%)

TheDeadCatBounce

99.51

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 these picks' high valuations -- and low ratings -- leave me cold.

Not so this week. All of these new-found objects of desire have fallen hard over the past year, and our best-performing stock is a homebuilder that's lost only about half of its value.

Rebuilding for tomorrow
Housing's got to turn sooner or later, right? Right? At least the builders like Pulte hope so. What started as a wipeout with the major builders has spread to regional and local companies too. Companies such as Levitt (NYSE: LEV  ) have seen some of their subsidiaries go bust.

While big financial powerhouses get propped up by the Fed, and homeowners who overextended themselves find Washington falling over itself to bail them out, homebuilders big and small feel ignored.

That's not completely true. Fannie Mae (NYSE: FNM  ) and Freddie Mac (NYSE: FRE  ) have been given a $200 billion injection to bolster the mortgage market which, in theory, will trickle down at some point to the builders. More likely it will be too little, too late, and the builders will need to renovate their own financial houses.

While the 3% rise in existing home sales encouraged some -- but the party started too early.

Not only has there been a glut of houses on the market leading to declines in home prices, but with the subprime mortgage market drying up, a huge swath of buyers has been removed as well. Stocks of homebuilders have been on the rise in recent months, but we've seen this kind of optimism catch investors by surprise before.

Some investors feel the government's stimulus package -- for taxpayers, mortgage companies, and financial institutions -- will be enough to stem the losses and turn the tide. Top-rated CAPS All-Star camistocks, for example, hopes it's best for builders due to the efforts to pump up the economy.

Since the Fed and the government have started to aggressively pump up the economy, I think there is a good chance that the bottom for homebuilders has been reached. The stocks usually bottom out 6-12 months before the real life economy.

Other players, like All-Star hondo928, aren't as sure that the near-term picture is clear yet, though if the builders can survive they look better over the long haul.

Not at a bottom yet expect the woes to continue through the summer. And the stock price will probably react slowly so I'd say it's safe to be short for a while, if you can handle a squeeze or two.

Similarly, another All-Star, blackeye101, writes in a recent blog that we've come to the end of a 60-year credit expansion and that means there is a world of trouble still ahead.

Finding value under rocks
So there you have it -- five low-rated laggards that have big endorsements from some of the best and brightest investors in the CAPS community. 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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