These Underdogs Are No Dogs

Short-sellers and hedge funds may be shadowy, but sometimes they're 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 also have 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 that 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)

cvdynasty0 99.97 Honda Motors (NYSE: HMC  ) ****
cecamadocv1 100.00 McDermott (NYSE: MDR  ) *****
InflationSilver 99.98 Sprint Nextel (NYSE: S  ) **

Source: Motley Fool CAPS.

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.

Searching for a solution
Although auto sales are at an eight-month high in October, the industry is not recovering evenly and Japanese automakers are still struggling with the aftermath of the earthquake and tsunami earlier this year. While Volkswagen led the pack with a 40% gain and Chrysler was up 28%, Honda Motors said sales were flat and Toyota (NYSE: TM  ) reported an 8% decline.

It might seem incongruous that Nissan was up 18%, but its Infiniti brand, which is sourced in Japan, was down 13.5%. The Nissan nameplate, which, as it turns out, is mostly built in North America, soared 22%. It also shows the folly of trying to assign labels to carmakers based on geographic region.

Honda's results were affected by its decision to cut back on incentivesmore so than other auto companies as it rebuilds from the quake, but it faces the other Asian calamity of widespread flooding in Thailand. So severe is the devastation that it will dramatically cut into Honda's operations and leave it incapable of providing guidance for the year.

The best thing going for Honda right now is that it's not Toyota. That carmaker also has extensive Thai exposure, its reputation still needs to be rebuilt, and much of its vehicle lineup has been uninspiring.

CAPS All-Star member MajorBob04 says Honda has its work cut out for it, though in the long run it should motor on.

Honda will suffer from parts shortages and production gaps for several months. Customers will get frustrated so their satisfaction and loyalty will suffer. Longer term I think they will rebound even better than most investors think, but HMC will [struggle] for awhile.

Add Honda to your watchlist and see whether it can drive back into the fast lane of growth.

Hanging up on wireless
Engineering and construction firm McDermott says its third-quarter results aren't indicative of what it can and will achieve, which is a good thing, considering the beating it took after revenues from its Middle East operations fell 30%. While the back half of the year will be weaker than the front, things should begin changing.

There's a lot of pent-up demand that needs to be met from projects that were delayed as a result of the recession. According to the industry analysts at Deloitte, Middle East oil companies will be responsible for $140 billion worth of contracts awarded this year, and it will see explosive growth over the next five years, particularly as the national oil companies move offshore to supplement and replace maturing onshore fields.

Fluor reported winning contracts last month for new offshore facilities in Abu Dhabi, and Maersk will do BP's (NYSE: BP  ) work off of Egypt. With a substantial proportion of McDermott's revenues coming from the region, it's likely to receive a good portion of those funds, too.

CAPS member stallionre is confident in the E&C specialist's ability to recover.

This stock will climb. It had a bad earnings report in October, but will climb for sure. It is a strong company with much profit, cash on the books and many billions of dollars of future bids. This stock will start climbing in December if [not] sooner.

Add McDermott to your watchlist, and let us know on the McDermott CAPS page whether you think its transition from a shallow-water and mid-water-level construction and engineering firm to one that focuses on subsea and deepwater work will to lift it to new heights.

Can't touch this!
Will Apple's iPhone be enough to salvage what's left of Sprint? Standard & Poor's doesn't think so, as the need to take on more debt to upgrade its network to accommodate the smartphone (it doesn't work on the WiMax system Sprint used through Clearwire (Nasdaq: CLWR  ) ) will further pressure its profit margins.

Not only does Sprint have to upgrade, but it also has to support Clearwire in the process and may use some of the proceeds from a debt offering to do that. It definitely has a full plate, including opposing AT&T's (NYSE: T  ) merger with T-Mobile.

CAPS member rymico says ridding itself of WiMax will allow Sprint to effectively compete once and for all and may make it attractive to someone else: "Possible take-over target and things will improve in their wireless division once they finally cut Wi-Max and fully realize LTE."

You can tell us on the Sprint CAPS page or in the comments section below whether you think it will disconnect, and then follow along by adding it to the Fool's 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.

Fool contributor Rich Duprey holds no position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Apple and creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.


Read/Post Comments (5) | Recommend This Article (2)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 07, 2011, at 9:03 PM, Aryabod wrote:

    Sprint is in an interesting position on a telecom chess board. You could say it is in check, however with plenty of options. One of its options was to merge or syndicate with TMo, however that option seems to be in jeoprody. The Lightsquared option also seems to be in jeoprody because of GPS interference. Nevertheless Sprint has plenty of other options, which could include Clearwire's future LTE-Advanced, the Cable companies and a pure play on its own.

    Unlike TMo, Sprint has a 4G plan and the wherewithal to consummate its plans; spectrum (800,1900, 2500 Mhz) and resources. Contrary to rumors Sprint had very little difficulty increasing its debt by $4 billion, albeit at a higher interest rate, leaving it with $8.3 billion in cash and another $900 million in a revolving line. This would amount to $9.2 billion. It is also understood that Sprint will be using Vendor Financing to assist it in its network upgrade to LTE. All in all the company is expected to save $11 billion in OpEx once its 'Network Vision' is completed. All this assumes Sprint has no luck with its potential partners, however things could get quite lucrative if Lightsquared is sanctioned by the FCC or the TMo merger is nixed by the Justice Dept.

    We should also not forget that every expert agrees the wireless sector is in for geometric growth over the next five years and having contracted the iPhone with a LTE platform that covers 280 million subs should keep the company competitive with its larger peers, ATT and VZ. In fact I will be bold enough to say that Sprint's current glide path makes it a very desirable take over target.

    Network Vision will allow the company to reduce its towers, from 68,000 to 40,000, hence substantially lowering OpEx. It will also save the company Billion of dollars in roaming charges and increase revenues by hosting spectrum from other companies.

    Sprint's plan is feasible and very beneficial. Its costs are substantially less than its accrued benefits. In fact when one does a comparison with its peers it is easy to see that after its Network upgrade Sprint's debt will still be substantially less than ATT or VZ's, even when one compares it commensurate to its subscriber base.

  • Report this Comment On November 07, 2011, at 9:22 PM, conradsands wrote:

    Sprint is the only U.S. carrier to offer new and existing customers the iPhone experience with unlimited data plans starting at $79.99 per month. Sprint has been recognized as a J.D. Power 2011 Customer Service Champion — one of only 40 companies to have earned this distinction this year. To qualify for inclusion on this elite list, the companies must not only excel within their own industry, but also stand out among leading brands in 12 major industries evaluated by J.D. Power and Associates.

  • Report this Comment On November 07, 2011, at 9:23 PM, conradsands wrote:

    Consumers are finally noticing that AT&T and Verizon = The Most Expensive Wireless Plans in America. We know where Verizon and AT&T (both in the top 5 for corporate lobbying) get all that money to run commercials 24x7, pay out huge “fat cat” executive bonuses and hire armies of lawyers and lobbyists to push the U.S. market into a wireless industry duopoly -- the American consumer. This is how AT&T and Verizon fashion themselves as brilliant … with their political use of money.

    Taking into account the whole U.S. market, a combination of AT&T and T-Mobile would increase the Herfindahl-Hirschman Index (HHI), a widely accepted measure of market concentration, to 3,216 from 2,848, according to a Bloomberg analysis. Any score above 2,500 indicates a highly concentrated market, and any increase of more than 200 points clearly enhances market power, according to federal guidelines.

    If this ridiculous deal goes through, Sprint will be the only low-priced post-paid national wireless carrier left in the United States. T-Mobile customers are already fleeing to Sprint because they know they won’t get low prices from AT&T or Verizon. But AT&T and Verizon are two of the top corporate lobbyists in the country, so beware of how things could “mysteriously” turn in this case.

    “It’s only a slight overstatement to say that if they weren’t going to block this one, the Justice Department might as well just throw the antitrust guidelines out the window,” said Herbert Hovenkamp, professor of law at the University of Iowa, who is considered by many to be the dean of American antitrust law. “This merger clearly seems to violate them.”

  • Report this Comment On November 07, 2011, at 9:23 PM, conradsands wrote:

    According to the report “Corporate Taxpayers & Corporate Tax Dodgers 2008-10,” two of the 25 companies with the largest total tax subsidies were AT&T at #2 ($14.5 billion) and Verizon at #3 ($12.3 billion). Also, there were 30 corporations that paid less than nothing in aggregate federal income taxes over the same period. These 30 companies, whose pretax U.S. profits totaled $160 billion over the three years, included Verizon. The report states the laws that allow this were not enacted in a vacuum, but rather were adopted in response to relentless corporate lobbying, threats and campaign support.

  • Report this Comment On November 08, 2011, at 10:49 AM, chadscards1274 wrote:

    Conradsands - first comment about Sprint rit on the money, second two comments make you sound like a conspiracy theorist.

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