These 3 Underdogs Are No Dogs

Short-sellers and hedge funds may be shadowy, but sometimes they're 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 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 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
When surf and skate retailer Pacific Sunwear (Nasdaq: PSUN) was more relevant to teen fashion than its stock indicates it is today, it used sales of its private-label Bullhead denim jeans to offset sagging sales elsewhere.

Put private label denim in the hands of a much more capable retailer like The Buckle, where the material comprises 40% of sales, and you have the makings of a company able to score real growth. It already considers itself a "denim destination" for shoppers, and fourth-quarter sales jumped 9% while same-store sales were up almost 4% from the year-ago period. Few retailers have been able to put together a string of rising comps throughout this recession like Buckle has. Aeropostale (NYSE: ARO) is the easy comparison, though both surprisingly hold similarly discounted market valuations.

CAPS member TrackWallStBean finds Buckle to be a competent, steady performer getting ready to sell to a much wider audience:

From the heart of the midwest, this small-cap niche retailer knows how to attract the ladies....and guys, of the young and fashionable kind. With profit margins that outpace the industry norms and same-store sales growth in 40 of the last 41 months, this slow and steady outfit is looking to expand from its mostly small-town presence by stepping into the bright lights of big-city life in 2010.

At a glance
The concept of a wearable computer has always been an intriguing one, though companies like Xybernaut tried to promote the potential before it or the technology was ready. Will Kopin be the one to make it a reality? The manufacturer of microdisplays recently unveiled its Golden-i headset computer, offering a hands-free, speech-recognition interface for cell phones, computers, and company networks. Designed by Motorola (NYSE: MOT), the headset provides a wearable computing experience that lets users keep their hands available for other tasks.

CAPS member kpdobe was impressed with Kopin's ability to turn in a record fourth quarter, driven primarily by double-digit percentage growth in III-V products, specialized chips used by the small consumer electronics market, particularly smartphone makers:

They just had the best 4th quarter in the history of the company. The stock didn't do much of a run-up prior to earnings and took a dive after earnings. The value is here, yet unrecognized. Sales continues to grow and see a very profitable year ahead.

Start it up
Housing numbers offered mixed signals as Standard & Poor's Case-Shiller Index rose a seasonally adjusted 0.3% in January, but when you unadjust the figures for seasonality, the numbers actually declined.

We may get a bounce next month as the government tax credit for first-time homebuyers expires again -- just like it did last November before Congress extended the program -- but even that might not be enough to overcome what analysts are saying is overall weakness. That could signal the next leg down in housing, which might not bode well for do-it-yourself centers Lowe's and Home Depot (NYSE: HD), which looked like they were just regaining their balance.

Without any broad improvement in the general economy, CAPS member PJR02 sees little reason for Lowe's to be able to outperform the market. Yet 88% of the more than 2,250 members who have rated Lowe's disagree, suggesting they think it will be able to build a foundation for future growth. You can vote on it yourself on the Lowe's CAPS page.

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 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.