These 5 Underdogs Are No Dogs

Short-sellers and hedge funds, though sometimes shadowy, are sometimes seen as the smartest investors 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 correctly predicting 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're going to look at recent Underdog picks, no matter which way they've been called.

Underdog

Member Rating

Company

CAPS Rating
(Out of 5)

Call

UltraLong

100.00

Diedrich Coffee (Nasdaq: DDRX  )

*

Underperform

dwot

99.98

Dollar Thrifty Group (NYSE: DTG  )

*

Underperform

msIRA

99.84

Valero (NYSE: VLO  )

****

Outperform

ElViking

99.81

Activision Blizzard (Nasdaq: ATVI  )

*****

Outperform

Pumpstick

99.45

Archer-Daniels-Midland (NYSE: ADM  )

****

Underperform

Not every short sale goes as planned, so it's a risky position to hold. Stock prices can be irrational for 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 launching pad for further research.

Underdogs still wag their tails
Although it's kicking and screaming the entire way, Sony may have no choice but to be dragged to the sacrificial altar of game-console price cuts. Year-over-year sales of its PS3 system have fallen for seven straight months, and with game industry sales dropping 30% to less than $1 billion in May, Sony will be forced to change its hard-line stance. If it fights the inevitable much longer, it faces the risk that top game maker Activision Blizzard will cease production of titles for the system.

A price cut would undoubtedly eat into Sony's margins, but the sales boost it would generate would stave off further market-share losses, and it might even require Microsoft to price its Xbox 360 even more aggressively. Nintendo, with its Wii positioned at the $250 level, remains the top-selling console maker, but has also witnessed declining sales in recent weeks.

A console price war would benefit game makers as well, since they realize higher game sales as more consoles are sold. Leading game retailer GameStop (NYSE: GME  ) has been agitating for Sony to cut its prices for a while now, and it would also like to see more movement in the market.

Activision Blizzard, however, might be able to move the needle all on its own. In addition to its insanely popular and addicting World of Warcraft franchise, it will be releasing four titles for mobile-phone users, including Guitar Hero 5. A combination of an improved console cycle and its own raft of new or improved game releases puts the joystick in Activision Blizzard's hands.

Watching my own daughter's struggle to go cold turkey with her WoW obsession helps me understand why CAPS member riffle10 believes the game maker will continue to succeed:

Three words: WORLD OF WARCRACK. They have structured this game in a delightfully similar fashion to a drug-dealer's business plan with the caveat that you pay a premium for the title up front. then it's $15 a month from there on. The game is addictive and cannot be beaten (read: it doesn't end) and for some is a real means of social interaction. Toss this in with a huge suite of other world-beating titles in a rapidly expanding industry and there's alot to like about [Activision]

Even though it trades at 19 times future earnings, it's not particularly expensive. While Electronic Arts and Take-Two Interactive (Nasdaq: TTWO  ) offer lower valuations, Activision Blizzard offers similar or better growth prospects. It trades at 30 times trailing earnings, or 23 times estimated earnings in 2010. With its five-star CAPS rating, it surpasses the average three stars that members have assigned to the 15 companies comprising CAPS' Videogames sector.

There's no need to fear ...
Underdogs are often at their best when they have their backs against the wall, 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. 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.

Take-Two Interactive Software is a Motley Fool Rule Breakers pick. Activision Blizzard and GameStop are Motley Fool Stock Advisor recommendations. Microsoft is a Motley Fool Inside Value selection. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a stress-free disclosure policy.


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