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
Highly rated CAPS All-Star zzlangerhans thinks there might be some potential to be found in biotech Cytokinetics myosin activator omecantiv, which recently opened phase 2b clinical trials in conjunction with partner Amgen (Nasdaq: AMGN). Following the disappointment last December with its treatment for Lou Gherig's disease, zzlangerhans said the biotech has lately been throwing stuff at the wall to see what sticks. But with enough cash on hand, he believes volatility will be the watchword for the biotech:

The other bright spot is cash, which virtually ensures that Cytokinetics will enjoy more cycles of advance and decline. With an enterprise value of 18M, I expect the stock to rise once the phase IIb trial kicks off. The recent low was 1.25 and I'd buy in here with stabilization below 1.3

More than 90% of the CAPS members rating Cytokinetics mark it to outperform the broad market averages, so it's clear they believe it holds the winning combination. Head over to the Cytokinetics CAPS page and let us know if you think the biotech's on the right team.

And eroding foundation
After a difficult period for storage leader EMC (NYSE: EMC), the desire to get its operational house back in order has been key to its turnaround, and shares trade 50% higher than they did a year ago. That has meant pain for suppliers like STEC (Nasdaq: STEC), which suffered when inventory issues led to a cutback in orders. Now Network Engines is feeling the pain of a company transitioning itself to a new plateau. The application platform solutions provider said two weeks ago that EMC had decided to dual source one of its product lines, meaning Network Engines is going to lose $5 million to $7 million in revenues, and up to $700,000 in profits. It was already offering guidance that was below analyst forecasts, and while the EMC decision won't impact the current quarter, future periods could see on average $10 million in lower sales, and more than $1 million in reduced net income.

Network Engines remains a CAPS favorite with a unanimous belief among All-Star members that it will still be able to outperform the broad market averages, though few are talking about it currently. Head over to the Network Engines CAPS page and rev up the discussion with your own thoughts on its progress, then keep tabs on it by adding it to the Fool's free portfolio tracker.

Walking away
Having divested just about everything but its Internet naming business, VeriSign has yet to convince analysts how it's going to grow. The authentication and security line it sold to Symantec (Nasdaq: SYMC) last year has Wall Street seeing the security firm exceeding expectations, but the void left behind at VeriSign is expected to essentially suck the life out of the company. At best it will be static.

It did settle a lawsuit against it recently over how it came to acquire the .net registry agreement with ICANN, contending VeriSign got the contract without competitive bidding. VeriSign collects a fixed fee each time a new .com or .net domain name is registered or an existing domain name registry is renewed. It's a steady, recurring revenue stream and significant power in the website market, but doesn't appear to offer much in the way of growth opportunities.

The domain registration service still has its backers on CAPS -- 83% of those rating it think it will be the broad indexes. Despite a bad economy and the private sector cutting back still, government continues to grow in size. VeriSign's operating the .gov domain registry (along with the .xxx registry finally going live) just might provide opportunities for it to get bigger, too.

Add VeriSign to your watchlist and dial up additional views on the VeriSign 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.