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
The housing market looks like it wants to turn around, but the over the top support its been getting from the government to prop it up makes it difficult to know whether there's any real recovery afoot.

For example, Pulte Group (NYSE: PHM), the country's largest homebuilder, is expecting to turn a profit this year after 14 consecutive quarters of losses, while Beazer Homes (NYSE: BZH) showed improvement across the board, from lower cancellation rates to a near 50% jump in new orders. But by keeping interest rates absurdly low, engaging in massive purchases of mortgage-backed securities, and extending first time homebuyer tax credits, the taxpayers have been shouldering a large part of the risk associated with not allowing the industry to shake out as it otherwise should have.

Considering the dangerously high levels of new mortgages the FHA is underwriting, private mortgage insurers like PMI Group are getting squeezed. Its losses in the most recent quarter widened as a result of lower levels of new insurance being written and a decline in primary insurance.

CAPS member psutton007 is certain that PMI, having survived this long into the housing market debacle, will be able to bootstrap its way back to profitability, and 58% of CAPS members rating the mortgage insurer apparently agree, believing it will continue to outperform the market.

Don't hang up
The build out of China's 3G wireless network has given Telestone Technologies the necessary platform to showcase its wireless communications equipment. The country's three big players all use Telestone's equipment and China Mobile (NYSE: CHL) just bestowed another contract on it, which Telestone estimates will be worth about $8 million.

While shares have been in a tailspin lately, CAPS member OLDBLUE1964 thinks it's only a matter of time before this stock is no longer tucked away in the hidden recesses of the market.

This is among the most undervalued stocks in the technology sector. It has no analyst coverage, which will have to change in the near future, but given its recent statement of $118 million in revenue for 2010, it's probable that the company will show at least a 50% increase in EPS. If that happens, it would place earnings for 2010 at $1.81. At a current price of $13.66, that gives TSTC a P/E ratio of 7.5, which is absurd. With a 50% growth rate, hell, call it a 20% growth rate it should have a P/E of at least 20. At that level, the stock should be selling for $36 per share.

Calling home
Closer to home, both TriQuint Semiconductor and Skyworks Solutions (Nasdaq: SWKS) are benefiting from the growth in wireless networks too. Skyworks saw operating income more than double in the second quarter while TriQuint enjoyed an 85% increase in revenues in its 3G networks segment. With continued strong demand from smartphones, TriQuint is looking for exceptional sequential second-quarter revenue growth.

No wonder 97% of the CAPS members rating the maker of RF devices for cellphones suggest it will continue outperforming the broader market averages. However, you can dial up your own opinion on the TriQuint Semiconductor 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.