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 also got leading analysts who find the chinks in a company's armor and correctly call its fall. Our "Underdogs" 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 stay irrational longer than you can afford to short them. 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
With A-Power Energy Generation Systems still not generating much of anything from its wind power operations, the possible loss of industry cash-grant financing might leave it foundering like a ship in the doldrums. Two-thirds of the government grant funds went to wind power projects, and even General Electric (NYSE: GE ) couldn't be persuaded to invest in a huge Idaho wind farm until the Treasury Department contributed $100 million in financing. If companies won't pony up without taxpayers investing alongside them, A-Power may not be able to power up, either.
However, Force Protection suddenly looks like a force to be reckoned with again. Instead of OshKosh (NYSE: OSK ) replacing Force Protection's MRAPs in Afghanistan, its M-ATVs are supplementing them. That means lucrative maintenance contracts will continue to feed Force Protection, giving us yet another reason to fall in love with a Cougar.
A dose of reality
You don't need to look abroad to find evidence of fraud and chicanery in corporate operations. Yet venturing to new markets can often force investors to face the risk of underhanded dealings, particularly in newly capitalistic markets like China, where reporting is more opaque and relationships, or guanxi, account for just as much as following good form.
With China Sky One Medical and Fuqi International still fresh in their memories, investors who put their money in Orient Paper were rocked by charges that the Chinese paper-products company was little more than a shell. Though the company has responded forcefully to the allegations, the stock has yet to regain any traction, and still trades for half the price it did before the accusations were made.
A lot of the charges seem based on insinuation, and no smoking gun has yet been uncovered -- although that hasn't stopped trial lawyers from jumping in with class action lawsuits. Investors seem to be bearing in mind that the original research that led to these allegations was done by an investment outfit that stood to gain if Orient Paper's stock fell.
CAPS member simplemts urged investors to ignore the allegations, since management has willingly stepped forward to defend itself. But luebypopoff says the evidence is mounting against the company.
With little in the way of new developments since the original charge was made, the stock has not moved much one way or the other. That prompted CAPS member fmede to wonder whether the water has cleared on Orient Paper, a question that has generated a lively, thoughtful discussion. As fmede wrote:
I bought shares today. I find it hard to believe that they would have reported a gain for the past quarter knowing that the company will be under scrutiny now.
It is amazing how good news on earnings were completely offset by short-sellers who believe or take advantage of a single report from a recently formed research company without any credibility. The more I think about it, the more convinced I am... As simplemts said, the potential rewards outweigh the potential risks...
What's your opinion? Paper the comments section below or the Orient Paper CAPS page with your thoughts on whether this Chinese small-cap stock will overcome the allegations against it, or fold under their weight.
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.
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