These Underdogs Are No Dogs

Short-sellers and hedge funds may be shadowy, but sometimes they are the smartest ones 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 fail, it may be worth our while to see which others they think will succeed.

Underdog

Member Rating

Company

CAPS Rating 
(out of 5)

InflationSilver 99.97 Freeport-McMoRan (NYSE: FCX  ) ****
FreeMortal 97.82 Integrated Silicon Solution (Nasdaq: ISSI  ) ****
dbillett1 92.97 TeleCommunication Systems (Nasdaq: TSYS  ) ****

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
Happy days are here again. Consumer confidence is soaring. Existing-home sales are up. The stock market is up 5% year to date and 16% from its summer doldrums. Naturally, gold is falling as a result. Not much, mind you, because it's still in record territory and it remains an exceptionally popular investment, but if gold ATMs start appearing, it just might be one sign of the apocalypse.

Still, the Federal Reserve's willingness to pour even more money into the economy certainly helps keep gold at elevated levels. That's good news for Freeport-McMoRan, which reported higher earnings for the third quarter as well as a 24% boost in sales. Big miners like Yamana (NYSE: AUY  ) , Goldcorp, and Newmont will also benefit from Fed Chairman Ben Bernanke's desire for higher inflation, and we're likely to see similar results when they report.

CAPS member joats5 says this modern-day gold rush won't end any time soon, and BobMcIntyre1 says emerging markets will keep demand high.

Gold will be a good increase for a little longer and copper will be in great demand from China, India etc.

Only you can decide whether gold belongs in your portfolio, so add Freeport-McMoRan to portfolio tracker My Watchlist to get all the Fool has to offer about the company.

All charged up
Those broad economic trends that are pressuring gold are just what's working to make Integrated Silicon Solution a great investment. At only five times earnings for 2011, the company is trading at a significant discount compared with its growth prospects, as are peers Micron (NYSE: MU  ) and SanDisk (Nasdaq: SNDK  ) .

Integrated Silicon Solution had a backlog of business for the third quarter, which to some suggested fears about a double-dip recession. With the company reporting fourth-quarter earnings Wednesday, we'll get to see whether its confidence in the future was warranted. Backlog doesn't always neatly translate into new sales, but it should present a good proxy for how other businesses view the future.

Moreover, its low valuation could make it an attractive takeover candidate. According to analyst David Sterman, while the list of undervalued takeover targets is long, Integrated Silicon Solution is just as likely as any other company to get swept up in the merger frenzy.

Of course, many of these deals will never happen, so you should buy these stocks for their fundamentals, and not because you expect a buyout offer to emerge. But make no mistake, the P/E buyout frenzy is clearly under way and will remain in place as long as borrowing costs and current equity valuations are low.

Getting schooled
TeleCommunication Systems has been shaking the market after two new orders from the U.S. Army, which came on top of a separate military contract. Because government contracts are awarded unevenly, comparing revenues quarter to quarter or even year over year becomes difficult. But as seen with another contract awarded yesterday for equipment and maintenance of the Army's satellite systems, the lumps are going to look like bulges when TeleCommunication Systems reports earnings next quarter.

As Force Protection (Nasdaq: FRPT  ) can tell you, those who live by government contracts can die by them, too. But CAPS member prhea1st1 says TeleCommunication Systems should enjoy it while it lasts.

Government contract money is always good to have and know about for the [savvy] investor. Getting in a bit late at $5.33 but should get to $10 after their earnings start posting with the gov sales.

Let us know how you think the company will do on the TeleCommunication Systems 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.

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings.


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