These Underdogs Are No Dogs

Short-sellers and hedge funds may be shadowy, but sometimes they are the smartest folks 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, today 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 – it's just the launching pad for further research.

Underdogs still wag their tails
While I think the Obama administration is off base with its witch hunt against the for-profit education sector, I don't think I'm telling tales out of school by saying some of the players give the government the ammunition it needs to take potshots.

Career Education (Nasdaq: CECO) just discovered "improper practices" related to placement rates at some of its health-care campuses. It's great that it found them, but it was the company's lawyers who discovered the discrepancies, and only after they had received subpoenas from New York state. That kind of finding makes it look like the company was hiding the information, whether it actually was or not. (I bet if you put public universities under the same magnifying lens, you'd find some pretty unsavory practices, too.)

Meanwhile, a senator allegedly using political pressure to force the usually apolitical GAO to make up damaging results is bound to dredge up some real problems. And in the recent market sell-off, the whole sector crumbled. Corinthian Colleges is down 20% for the week, Apollo Group (Nasdaq: APOL) is down 10%, and Career Education is off 23%.

Trading at just a minuscule fraction of its sales, Corinthian Colleges is one of the cheapest for-profit educators around, and trades at a discount to its book value. That could be why 83% of the CAPS All-Stars rating Corinthian think it will go on to beat the broad market averages.

Why not crack the books on the Corinthian Colleges CAPS page and let your fellow Fools know whether it will graduate to the next level.

Drink up!
I'm more than willing to go out of my way to grab coffee at a McDonald's in the morning, but I can't say the same for one of its new smoothies. I might get one if I'm already grabbing a bite to eat there, but they aren't turning the burger joint into a beverage destination spot for me.

But I'm apparently in the minority, because McDonald's drink lineup has helped push same-store sales higher globally for the franchise. Comps rose 5.1% last month on the strength of its smoothies, lemonade, and McCafe shakes. Beverages on its Dollar Menu didn't hurt either.

The trend should be worrisome for Jamba (Nasdaq: JMBA), which prides itself on its smoothie offerings, but finds itself in a state of flux. As Jamba works through the transition from a company-owned store format to a more franchisee-owned model, it could allow McDonald's to grab more share.

Highly rated CAPS All-Star hejustlaughs says McDonald's has a chance to expand beyond just budget-conscious consumers:

[McDonald's] is the perfect stock to weather a down economy. Their menu caters to not just the lower end of the fast food spectrum but the low-mid end too with their expanded menus.

Tell us on the McDonald's CAPS page if investors should stick to the stock like salt to a french fry.

Did we disconnect?
CAPS All-Star JakilaTheHun is taking a deeply contrarian position by picking homebuilder Pulte Homes as a potential monster stock. While there's a great chance that housing, a number of years down the road, will have recovered enough to restore Pulte to its former glory, I'm too much of a pessimist to expect anything over the next year or so.

Beazer Homes (NYSE: BZH) just said losses widened even further in the third quarter, but it's just the latest in a string of homebuilder companies getting ravaged by unrelenting weakness in the housing market. Pulte was able to at least meet analysts' (low) expectations, which may actually be what's driving the hope that it will lead any turnaround.

While CAPS member pchop123 thinks the country's debt downgrade targets housing, too, hbomb14 says that at some point, a stock is just too cheap to ignore:

Unsustainably low housing growth suggests 100% growth starting in 2013. Trading at BV. Could be $13 stock

Build your own thesis on the Pulte Homes CAPS page and add the stock to the Fool's free portfolio tracker.

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.