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 have taken a beating. If Warren 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 results.

Over on Motley Fool CAPS, our top-rated All-Star players represent the best 20% of our more than 105,000 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 (5 Max)

1-Year Return

CAPS All-Star

Player Rating

Toll Brothers (NYSE: TOL  )

*

(14.5%)

osborta

99.32

Syntroleum (Nasdaq: SYNM  )

**

(15.2%)

columbia1

98.52

Casual Male Retail Group (Nasdaq: CMRG  )

**

(57.7%)

FreundInvesting

99.87

Pacific Ethanol (Nasdaq: PEIX  )

*

(64.3%)

tigertx04

97.71

Ambac Financial (NYSE: ABK  )

*

(96.1%)

cqdcat

94.50

Typically, there's a low-rated stock that leaves me leery from having enjoyed a large one-year run-up in its stock price. Sure, stocks can continue to run, but these picks' high valuations and low ratings leave me cold. Not so this week, as all of the companies on our list have suffered appreciable declines in their stock prices.

Grease lightning
Although alternative fuels remain all the rage, particularly in light of oil prices residing above $125 a barrel, it's solar, electricity, wind, and fuel cells that garner most of the attention. When you think of biofuels, you probably don't think of a billion-dollar business opportunity. You probably think of that crazy guy with the wild hair down the block who takes used restaurant grease and makes everything smell like french fries when he drives his modified car around the neighborhood.

Syntroleum is seeking to change that image, but even this company might seem a little nutty to some onlookers. It's in the development stage with Tyson Foods (NYSE: TSN  ) to build biodiesel plants that will use low-grade chicken fat and grease that's too impure to use in traditional biodiesel conversion processes. It will then take that product and run it through a proprietary "Bio-Synfining" process to create a high-grade alternative fuel. So maybe instead of thinking about french fries, we'll now want to make a trip to KFC after a biodiesel car rolls by.

The company also has the U.S. Air Force looking at the process for its jet-fuel capabilities. CDI (NYSE: CDI  ) is working with the Syntroleum-Tyson joint development company to build a jet-fuel plant in Louisiana.

Still, as promising as this sounds, a lot of words are in the future tense when discussion ensues. words The biodiesel products this company will produce are still quite a way off, and the company admits in its SEC filings that it doesn't expect to realize any significant revenue from its facilities for at least the "near future."

The lack of revenue keeps some investors cautious on this company, even if the end product might be useful. For example, CAPS player adallik sees problems if Syntroleum has to go back to the credit markets to raise money during a time of illiquidity: "Syntroleum's near-term revenues are not enough to cover operating costs, requiring the firm to find new revenue and funding sources. A weakened credit market could hamper the company's ability to raise funds and delay projects."

On the other side, msol800 finds Syntroleum to be a long-term investment that will ultimately turn profitable through the combination of business services it provides:

In the long term this is a must have. [Syntroleum] is taking fats and upgrading into a high quality diesel fuel using well established hydroprocessing techniques. With distillate spreads looking very strong for the next several years this technology provides a way to produce diesel/kero without the high priced oil feedstock. Process is hydrogen intensive but if [you're] bullish on the price of oil, this is a cheap way to get in and take advantage of great margins.

Finding value under rocks
So there you have it -- five low-rated laggards that have gotten 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.

There are no newsletter recommendations in this article. That's OK, though. We'd like to invite you to try any of our Foolish newsletter services free for 30 days.

Fool contributor Rich Duprey owns shares of Casual Male but has no financial position in any of the other stocks mentioned in this article. You can see his holdings. The Motley Fool has a disclosure policy.


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