These 5 Underdogs Are No Dogs

Short-sellers and hedge funds may be shadowy, but sometimes they are the smartest guys in the room. They've done their homework, and they're willing to bet their capital against the crowd -- a strategy that can be as lucrative as it is contrarian.

On Motley Fool CAPS, we also have members who find the chinks in a company's armor and correctly call its fall. Our "Underdogs" have 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. Instead of studying more of their pessimistic picks, we'll focus on the stocks these top members expect will outperform the market. If these CAPS investors have scored big by correctly predicting which stocks will fail, it may be worth our while to see which others they think will succeed.

Not every short sale goes as planned, making shorting a risky proposition. 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 the launching pad for further research.

Underdogs still wag their tails
Investors in American Capital Agency aren't buying into a company that has been bailed out or can fall back on federal purse strings. Instead, they're buying into the securities it invests, which are backed by the full faith and credit of the taxpayer. Externally managed by private-equity firm American Capital (NASDAQ:ACAS), American Capital Agency is a mortgage real estate investment trust whose investments have their principal and interest guaranteed by government agencies like Ginnie Mae, Fannie Mae, and Freddie Mac.

Look at what that kind of backing has done for Fannie, Freddie, and even American International Group (NYSE:AIG). It pulled their fat out of the fire and saved their stocks from becoming worthless. That's not the way capitalism is supposed to work, but we were in a "crisis" and the government had to "do something."

Yet Ginnie Mae might be the next to falter in mortgage finance. Ginnie guarantees against default the $750 billion worth of mortgage loans backed by the Federal Housing Administration, which by the end of next year will have a portfolio worth $1 trillion. But cash reserves are rapidly decreasing as delinquencies rise, and an unpublished audit says that 14% of all the mortgages backed by the FHA -- and it underwrites a quarter of all mortgages written in the country -- are delinquent and 7% are in default. Boy, we better hope that housing really does recover and pricing improves. If it doesn't and Ginnie Mae winds up getting the next government bailout, American Capital Agency investors might be banking on Uncle Sam.

Some investors are attracted by this security blanket. CAPS member highsierras figures that with the government backing the repayment of 80% of all mortgages written, mortgage rates are being kept low, which is keeping American Capital's dividend high -- now almost 20%.

Mortgage REIT that invests in agency securities backed by a U.S Govt Agency (such as GNMA) or a U.S. Government-sponsored entity (such as the Federal National Mortgage Association, or FNMA, and the Federal Home Loan Mortgage Corporation, or FHLMC). As long as interest rates for borrowing remain low, this will be a terrific dividend yield.

There's no need to fear ...
Underdogs often shine brightest with their backs against the wall. Still, it takes more than a few All-Star picks and a quick paragraph to make buy or sell decisions. Start your own 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.