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 demise of electronics retailer Circuit City was supposed to herald the ascendancy of rival Best Buy. For a time, it did. The market bestowed upon the big-box store the sort of premium P/E befitting an industry leader.

Critics, however, contend that Best Buy's upswing was only a momentary shift caused by the loss of a market participant. By this logic, Circuit City's bankruptcy actually signaled the end of the big-box concept. Best Buy may be losing ground to merchants who can give consumers better prices, either by operating a lean business like Amazon.com (Nasdaq: AMZN), or by squeezing suppliers for the best possible terms like Wal-Mart (NYSE: WMT). Best Buy, critics say, is a zombie that doesn't know it's dead yet.

I tend to think that description's a bit overwrought, but I do agree that the frenetic layout of the big-box concept is played out. We're seeing retailers from all corners reducing their footprint, including Best Buy and Wal-Mart. The electronics superstore isn't dead; it's only just recognizing the new reality, which makes its lower stock price an opportunity.

CAPS member NorthonCharles realizes this, too: "Underperform due to square footage dedicated to declining product segments (music/dvd)."

I prefer to look toward Best Buy's plans to expand its smaller Best Buy Mobile concept, which enjoys much higher profit margins. Tell us on the Best Buy CAPS page whether Best Buy is a stock best left alone.

A canary in a coal mine
Shares of Chinese coal miner SinoCoking & Coke Chemicals are plummeting today, supposedly as a result of a newsletter writer recommending a sell. While that may be true, it's probably not helping any that another Chinese coal company, Puda Coal (Nasdaq: PUDA), stands accused of fraud today. Alfred Little, who highlighted allegedly fraudulent actions by China's Deer Consumer Products (Nasdaq: DEER), urged investors to beware Puda, too.

While the drop might deflate CAPS members who only recently recommended the stock, it could also offer a better entry point. Just yesterday, COPYDOG thought that all the talk of Chinese small-cap fraud was holding SinoCoking back, even though it runs an actual business:

They are acquiring some nice coal mines in Henan. They got the loan for it, so everything is going great. Everybody is just holding it's breath with [China Agritech] and [China MediaExpress] in though. But [SinoCoking] is different they have mines and have installation. It is not just air

Let us know on the SinoCoking & Coke Chemicals CAPS page whether you think this company is the real deal or just a lump of coal.

All aboard!
It's hard to get excited about uranium stocks right now. Just as the world was beginning to come to terms with Japan's nuclear reactor situation, another major earthquake rocked the country right by the reactor. So far, there doesn't appear to be any additional damage to the Fukushima nuclear plant, but radiation levels continue to rise in the ocean surrounding the stricken facility.

Uranium Resources has rebounded from the worst of the drop it suffered in the aftermath of the original quake-tsunami-reactor meltdown. And while the environment for building new reactors is fundamentally changed from a month ago, so long as Japan's crisis doesn't suddenly devolve further, the industry would be right to expect improvement.

With 91% of CAPS All-Stars rating Uranium Resources to outperform, they're expecting the uranium play to overcome this hurdle. Follow the industry's "meltup" by adding Uranium Resources to your watchlist.

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.