These 3 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 -- 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. However, we're going to 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
Although the tragic accident involving a Massey Energy (NYSE: MEE) coal mine has the potential to besmirch the reputation of all coal producers, whether deserved or not, the industry should be able to rise above the tide of recriminations currently flowing its way.

Patriot Coal is a key producer of thermal coal for utilities, but the recession has weakened demand and low prices for natural gas make that an attractive alternative. That's left Patriot to rely more upon its metallurgical coal supplies for steel producers. With demand rising in China and India from idled steel mill capacity being restarted, it might be the catalyst that pushes more coal overseas than has historically been the case.

Analysts are looking for Patriot and Arch Coal (NYSE: ACI) to be the beneficiaries of that push. However, CAPS All-Star JakilaTheHun believes that China's appetite for natural resources inflates demand, and is a bubble this CAPS member is willing to bet will burst with wide-ranging effects.

My bet against Patriot isn't solely rooted in opposition to coal-power, however. I'm also betting that we are in a bit of a commodities bubble right now, fueled by Chinese growth. This has increased the price of commodities significantly. I'm not completely sure how the Chinese bubble burst will affect an Appalachian coal miner, but I'd be willing to wager that the impact is bigger than some might think. We'll see.

At a glance
Avatar was a big deal for advancing 3-D technology and movie theater owners are reportedly running with it, raising prices above the premium the format already commands. No doubt LG and Sony (NYSE: SNE) are looking to cash in as well on the phenomenon, and are hoping Avatar's DVD release helps with sales of their new 3-D television sets. Sony thinks 3-D TVs can comprise as much as 50% of the sets it sells in 2012.

IMAX, at the high end of the 3-D spectrum, perhaps stands to gain the most. In an interview with the Fool's Jennifer Schonberger, CEO Richard Gelfond recently noted that a digital copy of one of its films costs them pocket change to produce and distribute, compared to a film print, giving them the flexibility to show multiple movies on one screen. Combine low costs with high prices, increasing demand, and new international markets and you have a powerful combination for growth.

There are other 3-D formats on the market -- Dolby Labs (NYSE: DLB) makes one -- but CAPS member Relem thinks IMAX's unique offering sets it apart from the competition.

The fear that competing 3-D technologies will will pose a threat to Imax are overblown. Anyone willing to fork over extra cash for a premium movie experience would be loath to settle for generic theater offerings.

Nice threads
High fashion men's jeans retailer Joe's Jeans met with the ugly reality of the market when it reported profits that dipped slightly from the year-ago period, though earnings of $0.01 a share met analyst expectations. The shares shaved 16% off their value, giving investors like CAPS All-Star Predaking the thought that this is a buying opportunity, because much of the lower profits came about only as a result of having to pay taxes. Last year Joe's rate was just 15% due to allowances, but its expiration caused the effective tax rate to jump up to 48% this time around. Sales were also up 41%.

Although the sell-off seems misguided, it's interesting to note the company's largest stockholder (and a director) with a 21% stake in the company also gets a cut of the profits before anyone else. Joe Dahan, the man from whom the company licenses the Joe's brand, gets 11.33% of gross profits above $11.251 million with declining percentages as gross profit rise above $22.5 million. Let's just say he scored a nice paycheck this quarter ahead of other shareholders and this arrangement goes on until 2017.

Joe's Jeans is a CAPS favorite with 97% of those rating the retailer marking it to outperform, but I find that arrangement to not be exactly shareholder friendly. Give us your views on the Joe's Jeans 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.