These 5 Underdogs Are No Dogs

Short-sellers and hedge-fund operators, although sometimes shadowy, are often seen as the smartest guys in the room. They did their homework and will bet their capital against the crowd. Their way is not 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 found the chinks in a company's armor and correctly called its fall. "Underdogs" are investors who earned 100 or more CAPS points by correctly predicting that one or more stocks would underperform the market.

Let's look at some of the recent calls these All-Star investors have made. Yet, just as hedge-fund operators don't always go short, we're going to look at recent Underdog picks no matter which way the All-Stars have called them.

Source: Motley Fool CAPS, 9/30/08.

Not every short sale goes as planned, so it's a risky position to hold. Stock prices can be irrational longer than you have 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.

Underdogs still wag their tails
That DryShips is trading at less than a third of the price it had reached at the start of summer has many investors believing the market overreacted. CAPS member noplanecents thinks DryShips will move higher when cooler heads prevail: "When the waters calm and the world figures out that their products need to move, so will the price of this stock!"

The low price also left CAPS member cnelson2 scratching his head over how low the dry-goods bulk shipper had fallen:

Look at the prices right now. I can't see this going much lower. There are problems in the global economy, no doubt about that. But below $40? Really?

If the financial markets are in trouble, surely the airlines are, too. Oil prices have slipped below $100 a barrel, but it's still a costly commodity for the likes of AMR, Southwest Airlines (NYSE: LUV), and Continental (NYSE: CAL). Many airlines have initiated itemized fees for everything from food and drinks to pillows in an attempt to generate additional revenues, but the economics simply makes airline stocks a dangerous place for your portfolio to land.

CAPS All-Star uclayoda87 says that as oil prices rise again, AMR and the other airlines will find themselves in an even more precarious situation: "When the price of fuel goes back up in an uncertain economy, demand destruction for business and vacation travel will result in lower revenue with fixed or expanding costs. The future holds consolidation for the airline industry."

Another business having a tough go of it is regional banking, particularly in Florida, where the housing meltdown has decimated a number of related industries. CAPS member dpid pointed to BankAtlantic Bancorp as underperforming because of having to effect a 1-for-5 reverse stock split. Although its mortgage lending never included subprime mortgages, option ARMs, or other such similarly risky practices, BankAtlantic has seen its shares fall nonetheless.

Reverse stock splits often happen at companies that are in financial trouble. BankAtlantic's recent dividend declaration, however, would seem to belie that it is in difficult financial straits.

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 at Motley Fool CAPS, where your opinion can still save the day. 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.

On Oct. 7, 2008, Fool Co-Founder David Gardner and his Motley Fool Pro team will invest $1 million in a portfolio designed to help you make money in any market. In the coming weeks, the team, relying heavily on proprietary CAPS "community intelligence" data, will establish long and short positions in a broad range of securities, including common stocks, publicly traded put and call options, and exchange-traded funds (ETFs). To learn more about Motley Fool Pro and to receive a private invitation to join, simply enter your email address in the box below.