These 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
Investors in American Capital Agency are getting the full faith and credit of the U.S. taxpayer when they invest alongside the mortgage REIT. Its investments in pass-through securities and collateralized mortgage obligations have their principal and interest guaranteed by government agencies like Ginnie Mae, Fannie Mae, and Freddie Mac.

While the public's faith in the government's credit may be sorely tried these days, CAPS member auriolus believes American Capital Agency, which is externally managed by private equity firm American Capital Ltd. (Nasdaq: ACAS), will benefit from widening spreads in its business:

Company invests in securities backed by FMNA, FMAC, and GNMA. With low borrowing costs and rising mortgage rates the spread will get wider and AGNC will get more profitable. Adding current dividend yield... :)

That dividend, currently yielding in excess of 20%, was one of only a few raised by REITs during the recession, suggesting  underlying financial strength.

You snooze, you lose
According to Ernst & Young, there's a $2.2 trillion treasure trove of cash sitting in bank accounts of private equity and Fortune 1000 companies. That kind of number should give hope to investors in Somaxon Pharmaceuticals, which recently received approval for its insomnia therapy, Silenor. CAPS member feathersman put a thumb up on the stock two weeks ago, saying, "Likely near term take over target. Recent CFO hiring good indicator that is the game plan."

While a buyout might be attractive to an Eli Lilly (NYSE: LLY) or Pfizer (NYSE: PFE), Silenor has some key benefits over its main rival, Ambien, that might make management want to go it alone. For one, where Ambien is designed to help people fall asleep, Silenor was created to help them stay asleep. Analysts at Jeffries & Co. think that by capturing as little as just 5% of the market, Somaxon can generate $800 million in revenues by 2015.

That's a nice return that should give investors here a good night's sleep, regardless of whether Somaxon is bought out or goes it alone.

A bright idea
CAPS member cashyash views enriched uranium provider USEC as an easy choice for investors:

This is the biggest "no brainer" I have ever seen. Proven technology, political connections, greatly improved less energy intensive technology. This is the future for America.

There's something to be said for this, particularly in light of the Energy Department's agreeing to provide $45 million for USEC's American Centrifuge project. With President Obama also promising $8 billion in loans for nuclear power, certainly utilities like Southern Co. (NYSE: SO) would benefit, but so would USEC, which would be providing many of them with their enriched uranium.

It's been 30 years since we've had a new nuclear plant built in the U.S., leaving many people skeptical over whether we'll actually see another. With the need great and the industry's record of safety, I'd say it's about time we did.

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.