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 also have investors 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 fall, 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 as a launching pad for further research.

Underdogs still wag their tails
A month ago, we wondered how it was possible that bond insurer Ambac Financial or its rival MBIA (NYSE: MBI) had managed to enjoy such a run-up in their shares, concluding it was based on anything but fundamentals. Even if Jim Cramer was yelling to buy into the crazy rally, investors were better served by seeing the bond insurer for what it really was.

Its latest quarterly report pulled back the curtain on Ambac, revealing losses that widened by 76%. The company has been warning for months now that filing for bankruptcy protection was an option, and after Wisconsin seized its main insurance business, it reiterated that.

While highly rated CAPS All-Star Chemdawg believes the company is worth more than the $1.50 Chemdawg paid for it if it survives, another All-Star bullshiite added, "IF it survives, yes."

Even at this discounted price, the risk-reward ratio looks to be skewed too much against investors. A bet here would be just that -- a bet. And that's gambling, not investing.

A dose of reality
If you're looking for a heavily discounted stock that sits well off its recent highs, Pfizer would seem to be a better candidate. The pharmaceutical offers valuations that are better than Merck (NYSE: MRK) on many levels, and with more than 130 programs in its pipeline sitting somewhere between phase 1 trials and much later stages, it gives it plenty of muscle for a competitive fight against GlaxoSmithKline or Novartis (NYSE: NVS).

Citing a report from an analyst he respects who says investors are essentially getting for free any new drugs Pfizer develops, TMFDeej says the pharmaceutical also meets a couple of his own qualifications.

So why invest in PFE? It excels in two of the three qualities that I look for in stocks, it's cheap and it pays a solid dividend. It currently trades at 13.6 times earnings and pays a 4.3% dividend.

A golden opportunity
TiVo shares haven't recovered yet from the drubbing they took on the news that Dish Network (Nasdaq: DISH) and EchoStar won the right to appeal an earlier court decision that their DVRs infringed on TiVo's patents. But even if it emerges victorious -- again -- it may have to worry about its subscriber losses, which continue to mount. Perhaps TiVo will be able to stem the hemorrhaging if it doesn't have to fend off competitors pilfering its customers.

CAPS member baniven thinks TiVo and DISH will come to their senses and work out an amicable agreement.

Stock has been beat down unfairly due to pending appeal. Dish will settle resulting in a return to market value.

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. 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.