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.

Underdog

Member Rating

Company

CAPS Rating
(out of 5)

jgknot 99.36 Cisco (Nasdaq: CSCO  ) ****
jimrausch 99.70 KB Home (NYSE: KBH  ) *
Plumbroke200 99.26 Suntech Power (NYSE: STP  ) ****

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
China doesn't like dissent, and keeping a close eye on its people is one way it moves quickly to quash potential problems. When Shanghai hosted the World's Fair and Beijing the Olympics, China Security & Surveillance (NYSE: CSR  ) was tapped to install thousands of CCTVs for monitoring. Ostensibly for crowd control purposes, the inclusion of cameras in houses of worship and Internet cafes seemed to put the lie to the government's cover story.

U.S. companies had no compunction about tapping the potential profit opportunity; Honeywell and United Technologies were there, offering their services. Now The Wall Street Journal reports that Cisco is providing the networking equipment critical to operating the vast, complicated surveillance system being installed for the latest initiative, "Peaceful Chongqing."

It's not Cisco's first time helping China keep close tabs on its citizens. China's vaunted Safe City project, which encompassed 660 cities as part of a larger initiative called Golden Shield, used Cisco-provided routers to search for and block sensitive search words and phrases.

I'll be reviewing my past purchase of Cisco's stock, purchased because I thought it was a beaten-down tech leader with potential for correcting past mistakes. With more than 10,800 CAPS members rating Cisco -- and 95% of them believing it can outperform the broad market averages -- I'm obviously in the minority on my concerns.

Add your opinion to the Cisco CAPS page on whether this is a worthwhile use of its resources.

An eroding foundation
I agree with my Foolish colleague Morgan Housel that housing will recover -- eventually. I'm not so certain it will be within the next two years, as he postulates. Yes, new households are being formed even as the supply of new houses grows at a much slower pace. On the surface, KB Home and Toll Brothers (NYSE: TOL  ) ought to be considered safe bets to profit from that gap, but with the overhang from existing homes on the market -- and new ones likely to be added – it's going to take a long, long time before things normalize.

While the number of homeowners receiving loan modifications was down 10% in the first quarter versus last year, it was up 17% from the fourth quarter. That's not speaking to an improving situation.

But for KB -- which said it was thinking about raising cash through a stock offering, bond issuance, or getting a line of credit to cover upcoming bond payments (before backtracking and saying it wasn't going to offer stock) -- even the two-year time frame Morgan holds to might be an eternity.

Highly rated CAPS All-Star buffalonate believes the homebuilder will get back on its feet again, but more than half the CAPS members rating KB think it won't be beating the market averages. Tell us on the KB Home CAPS page whether it can still build a future.

Walking away
The impact of lower prices is being felt across renewable-energy markets. While it makes systems more affordable, it wreaks havoc on company profits. Power inverter maker Satcon Technology (Nasdaq: SATC  ) , for example, dramatically lowered its gross margin guidance from 17% to 20% all the way down to a range of 7% to 11%.

Similarly, Suntech Power and MEMC Electronic Materials (NYSE: WFR  ) canceled a supply agreement because of falling polysilicon prices, despite having amended the contract several times over the years to reflect continuing drops in costs. Suntech, having to pay MEMC a $120 million termination fee, will save $400 million over the next five years.

CAPS member MikeB1985 has identified Suntech as the premier panel maker in the industry, one that also has top-notch management:

Suntech is the No. 1 panel maker worldwide, is expanding quicker than the competition, and has a good mix of low cost and high efficiency panels. Add a visionary CEO/founder, and they're assembling a very high quality group of executives. Not to mention, the stock price is a steal, and offers massive upside.

Add Suntech to your watchlist to see whether the falling cost of alternative energy will be a boon or bane to the industry.

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.

The Fool owns shares of and has created a bull call spread position on Cisco Systems. Motley Fool newsletter services have recommended buying shares of Cisco Systems. 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 owns shares of Cisco, but does not have a financial position in any of the other stocks mentioned in this article. You can see his holdings here. The Motley Fool has a stress-free disclosure policy.


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