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 -- an investing strategy that can be as lucrative as it is contrarian.
On Motley Fool CAPS, we've also got leading analysts 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 remain 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
Chinese online gaming outfit GigaMedia got hit with a war hammer when it finally released third-quarter results (and second-quarter earnings, for that matter). The numbers revealed the company's bottom-line slide from profits to losses. Its European division, which includes the poker site Everest Gaming, historically accounts for much of those profits, but competitive pressure forced GigaMedia to sell a 60% interest in its online gaming software business.
Rivals NetEase.com (Nasdaq: NTES ) and Shanda Interactive (Nasdaq: SNDA ) are also a concern; their growing sales and earnings have given them market-share gains. GigaMedia also complained about the weak launch of its Warhammer game, while NetEase's World of Warcraft remains a formidable franchise -- even though it had to wait till almost the end of the third quarter to be relaunched in China.
Whatever the potential merits of GigaMedia's strategic alliance with Mangas Gaming, investors have a lot to be concerned about here. Its prime profit-generating properties aren't making money, it's had a weak launch of a big-name franchise, and it has no new games on deck for the immediate future. Although it has almost $93 million in cash, which it can use to make acquisitions, management needs to prove it can be a good steward of the money. Going dark on its financial data for six months hardly inspires such confidence.
Investors remain cautious, even as they say the bottom could be at hand. "Honestly, looks like gambling at this time," says CAPS member Vermichelle:
Management proved themselves with Mangas deal of course, but what will be the next step. So many questions... Especially with plenty of competition. Hope it is on the bottom now... or close to that...
CAPS member hrc777 also believes the company's strategic alliance with Mangas will drive future growth:
We all know it has (will have) lots of cash. Mostly its a question of how well they will use it. On the other hand this Mangas operation has the size to really make the poker site a lot more valuable. The 2012 payment could be a nice surprise. Buying for myself.
The CAPS community remains solidly behind those efforts right now; 98% of the more than 2,500 members who have rated the online gaming specialist believe it will outperform the market. I'm not sure I agree, because GigaMedia seems to be trying to grab a smaller piece of a growing pie. That doesn't seem like a strategy for growth, though it may ultimately make the company an interesting buyout candidate. I've marked GigaMedia to underperform, and I encourage you to head over to the GigaMedia CAPS page and lay your own cards on the table.
There's no need to fear ...
Underdogs often stand tallest 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, 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.
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