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
Familiarity breeds contempt, they say, and distance makes the heart grow fonder. That could be why some investors will sink their money into just about any Chinese small-cap stock, but ignore opportunities just north of the border.

China Sky One Medical, a pharmaceutical and medicinal distributor, has been operating under a cloud of financial suspicion, similar to the scandal that sunk RINO International and has clouded the future of Fuqi International. Because reporting is much more opaque in China, and certain practices and relationships that aren't tolerated here are commonplace there, a yawning chasm of doubt exists.

Sometimes that doubt is exploited by short-sellers like John Bird, who profited from his discovery that what Chinese companies report to the SEC, and what they tell China's State Administration for Industry & Commerce, are sometimes two vastly different things. Investors would be wise to consider the motives shorts have, and whether their information is valid. CAPS member mattspicks thinks Bird and others aren't standing on completely solid ground:

Since then, after John and Muddy Waters presumably made a fortune on their short positions, ONP fraud allegations have been proved false (http://bit.ly/hXsCNO). Now CSKI is in John's cross hairs. Who else is on John's list? CHBT, CHNG and even CCME to name a few. Personally, I have more faith TMFBabo, vanamonde, TMFUltraLong, TSIF, etc... who believe CSKI is legit.

Yet why take on such risk, when just up north in Canada, Canadian Natural Resources offers a sound opportunity to profit from the country's vast oil sands reserves without the level of doubt about its finances? CAPS member toshimelonhead says that once the tar sands become viable, CNR is the winner:

This is the Goldman Sachs play on the oil sands. They have set a price target of $48, which does not leave me with much room but there is still something here. I might be a tad early on this pick, but once these oil sands are extractable, Canada becomes the second largest oil exporter in the world. "Peak easy oil" is here, and now it's time to find the tough stuff until we find alternatives.

Yet not so long ago, tar sands players were considered every bit as risky as Chinese small caps. Oilsands Quest (NYSE: BQI) was brimming with potential, but it now trades for literally pennies on the dollar and is looking to sell itself to someone -- anyone! -- as quick as it can. You can add Canadian Natural Resources to your watchlist and stay up to date on how long it takes before drilling into the oil sands becomes as economically viable as other deposits.

A well-dressed opportunity
Although its name sounds like it's from south of the border, Chipotle Mexican Grill is a homegrown casual-dining chain that hasn't been getting much respect from the CAPS community lately. That might not have anything to do with concerns about finances or whether it can prove itself in the marketplace -- it already has, and its shares are up more than 150% over the past year. That more than anything is probably why investors like All-Star 4Foolz see rising commodity costs eating away at margins:

Valuation is too high. Commodity costs will eat into margins, cause higher prices to their customers (as they try to pass the costs), which will eventually lead to less customers.

There's some sense to that, and to CAPS members' concerns about valuation. Chipotle's stock trades at 46 times trailing earnings, whereas McDonald's (NYSE: MCD) goes for 16, and Yum! Brands (NYSE: YUM), 21. And although Chipotle is expected to see more growth than both McDonald's and Yum! Brands, it's still trading at a pretty steep premiumcompared to those two companies.

Let us know on the Chipotle Mexican Grill CAPS page whether its most recent quarterly results warrant a market multiple as spicy as its barbacoa.

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.