These 5 Underdogs Are No Dogs

Short-sellers and hedge funds, though sometimes shadowy, are sometimes seen as the smartest guys in the room. They did their homework and will bet their capital against the crowd. It's not the most popular way to go, but the rewards can be quite lucrative.

On Motley Fool CAPS, we've got 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. Just as hedge fund operators don't always go short, we'll look at recent Underdog picks no matter which way they're called.

Not every short sale goes as planned, making bets on failure 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 -- just a launching pad for further research.

Underdogs still wag their tails
Politicians in need of revenue often resort to hiking taxes on "sin products" like cigarettes. By nearly tripling the tax on cigarettes to $1.01 a pack, for example, President Obama aims to finance a $32.8 billion expansion of the nation's health insurance program. Meanwhile, in 2007 alone, 11 states hiked cigarette taxes of their own, joining dozens of others over the past few years. New Jersey has raised cigarette taxes four times since 2002, giving it the highest cigarette tax rates of any state in the nation -- and it's considering another hike this year.

Yet Fitch Ratings forecasts a 4% to 7% drop in cigarette sales this year, while Reynolds American (NYSE:RAI) anticipates a 6% to 8% industrywide drop in volume. Investors hoping to profit from tobacco are probably better off  looking abroad. While cigarette sales in Western Europe are declining, emerging markets show no similar weakness. For a solid investment in this particular sin, investors should look no further than Philip Morris International.

Spun off from Altria (NYSE:MO) in 2008, Philip Morris doesn't carry the liability and litigation baggage still hovering above its former parent like a hazy cloud. All of its revenue is derived from the 160 international markets in which it operates; it throws off gobs of cash; its dividend yields more than 6%; and its stock price recently hit its lowest point since the spinoff, perhaps on fears of the worsening global economic climate. Despite the gloom, analysts estimate better than 9% growth over the next few years. Philip Morris International also wears its cheap enterprise value-to-FCF ratio of 11 quite well.

CAPS member apoorinvestor agrees, pointing to the company's acquisitions in various emerging markets as one reason to bet on solid growth:

Phillip Morris International was spun off from Altria in April 2008. As with Altria, they're making acquisitions in the smokeless tobacco market and PMI will be able to take advantage of growth in developing regions to offset slowing growth in industrialized regions.

There's no need to fear...
When underdogs have their backs against the wall, that's when they can shine their brightest, but it takes more than a few All-Star picks and a quick paragraph to make buy or sell decisions. So start your own research on these stocks on Motley Fool CAPS where your opinion can still save the day. While there you can 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. There's more than you think.