These 5 Underdogs Are No Dogs

Short-sellers and hedge funds, though sometimes shadowy, are often considered the smartest guys in the room. They did their homework and will bet their capital against the crowd. Their way isn't the most popular way to go, but the rewards can be quite lucrative.

On Motley Fool CAPS, we have our own brand of leading analysts who have found the chinks in companies' armor and correctly called their fall. "Underdogs" are investors who have earned 100 or more CAPS points correctly predicting that a stock would underperform the market.

Let's look at some of the recent calls these investors have made. Since hedge-fund operators don't always go short, we'll look at these All-Stars' recent picks no matter which way the Underdogs called them.

Going short is risky, since not every short sale goes as planned. Stock prices can remain irrational for longer than you have enough money to stay in the game. So don't use this as a list of stocks to sell or buy but rather as the launch pad for further research.

No insurance in effect
The occasional analyst keeps saying we've now hit the worst of the mortgage maelstrom, but losses tied to such loans keep piling up and dragging their holders down. Mortgage holdings caused insurance giant AIG to blindside the market with a much-greater-than-expected $5.4 billion loss. Investors still fear that the credit agencies will downgrade the insurer's ratings, thereby forcing it to post additional collateral and raise more capital.

CAPS All-Star leohaas correctly thought before the earnings call that with its mortgage exposure, AIG would have more bad news to report: "Insurer with significant exposure to the credit problems. They already wrote down $7.8B in the previous quarter, and I am not so sure that is the end of it!"

Profitability is not a commodity
Being able to pass along costs to customers has been one of the reasons that steel producers have done so well. Nucor saw its revenue rise 70% in the latest quarter to $7.1 billion. It generated profits that were 68% higher, an outcome that easily beat analyst forecasts. Others in the industry, including Steel Dynamics (NASDAQ:STLD), have put up their own solid numbers.

But with guidance for the next quarter coming in below expectations, the market dropped the stock like a molten ingot. Nucor increased its share count back in May, a move that would have the effect of reducing earnings per share. And although share buybacks are always a possibility -- and would bolster EPS numbers -- Nucor has growth on its mind and is considering more acquisitions.

That's a sign of smart management, worrying about the business and letting the share price take care of itself. It's also one of the things top-rated CAPS All-Star intlvaw looks for in an investment, and that's the reason this member sees Nucor as a worthy investment.

It is necessary to distinguish between pure commodity plays in the materials sector and management bets. [Nucor] has arguably the best management in the business and a relentless continuous improvement culture. [Nucor] is U.S. focused and gets its raw material from scrap. I have no idea where we are in the commodity cycle, but a proven strategy is to buy good management at a great price and let the cycle take care of itself.

Jumping on the coal train
Controlling about 1 billion tons of coal, International Coal Group is reaping revenues today from contracts it negotiated two years ago. So while coal prices have been soaring lately, ICG hasn't yet begun to benefit, though it soon will. Moreover, as it moves more forcefully into metallurgical coal -- which is enjoying even higher prices -- the profits the coal miner realized this past quarter could become a regular occurrence.

As the market shifts its weight on correcting commodity prices, the Motley Fool Hidden Gems Pay Dirt recommendation's share price has tumbled as well -- to the tune of 30%. Arch Coal (NYSE:ACI) has fallen by 35% in that same time frame. CAPS member dogmaNrhetoric thinks the drop simply creates a buying opportunity.

Coal miners are down in a market correction, however the industry is reporting good earnings and beating estimates. Coal prices have not dropped like oil and natural gas. Good buy opportunity.

There's no need to fear ...
When underdogs have their backs against the wall, that's when they can shine their brightest, but it pays to start your research on these stocks on Motley Fool CAPS. Read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made -- all from a stock's CAPS page. Then don your superhero cape and head on over to Motley Fool CAPS, where your opinion can still save the day.