These Underdogs Are No Dogs

Short-sellers and hedge-fund operators 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)

bbmaven

100.00

Nuance Communications (Nasdaq: NUAN  )

****

valuemoney

99.98

Walgreen (NYSE: WAG  )

****

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
One of the things that made me hesitate about buying into Nuance Communications was its addiction to growth by acquisition. Hardly a week goes by when it doesn't seem to buy some company, and that makes it difficult to value.

In 2011, Nuance maintained that heavy spending spree, buying up anything even remotely related to its voice-recognition technology. There were six separate deals announced last year, one more than it made in 2010. It bought Vlingo at the end of the year, however, to capitalize on the growing mobile communications trend  — more specifically, the success Apple (Nasdaq: AAPL  ) had launching the iPhone 4S. Apple uses Nuance to power the voice recognition for its digital assistant Siri, one of the key selling points of the latest iPhone.

Scaling up can work wonders until it doesn't, and because Nuance is not just a single entity or product, but rather an amalgamation of many different products, it's difficult to see all the moving levers. However, it was Nuance's acquisition of Swype that attracted CAPS member emblazon3532.

The future looks very bright for Nuance with its recent acquisition of Swype. From recently posted articles here on MF, it sounds like management is very aggressive in searching for more markets for its voice recognition software.

Add Nuance to your watchlist and see speak your mind about its future in the comments section below.

Bringing on a migraine
With the severing of contractual ties to Express Scripts (Nasdaq: ESRX  ) , it's natural to consider pharmacy chain Walgreen behind the eight ball. It says it's planning on retaining three quarters of its business, but the pharmacy benefits manager took with it some major customers, like the Defense Department and WellPoint. Express Scripts represented about 7% of Walgreen's revenues.

So going it alone may not work out to its benefit, and even if Walgreen is successful in keeping a good chunk of its Express Scripts customers, it could still take a hit as big as $0.21 a share in 2012.

Competition with CVS Caremark (NYSE: CVS  ) has always been cutthroat but the introduction of new generics such as Lipitor, a healthy balance sheet, and, yes, the prospects Walgreen and Express Scripts can still work out some agreement mean the depressed price of the stock may represent an interesting buy-in point. It's certainly convinced CAPS member d1tiger to hang around.

Walgreen will have a tough year due to the Express Scripts issue; however, due to good cost control and generic profitability (Lipitor) the stock should outperform over the longer term (2‒5 years).

Let us know in the comments section below or on the Walgreen CAPS page if you think it still possesses the prescription for growth, then add the pharmacist to your watchlist see how it plays out.

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 Dupreyholds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Apple. Motley Fool newsletter serviceshave recommended buying shares of Nuance Communications, WellPoint, and Apple. Motley Fool newsletter serviceshave recommended creating a bull call spread position in Apple. 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.


Read/Post Comments (4) | Recommend This Article (4)

Comments from our Foolish Readers

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 January 11, 2012, at 5:16 PM, kmanm wrote:

    I hate reading Fools. You can't tell what is an advertising and what is not.

  • Report this Comment On January 11, 2012, at 5:46 PM, sage1193 wrote:

    I'm placing my money on ESRX. I believe this is a bit (but not severe) of a stumble by WAG. There are two possibilities that will boost ESRX's price this year. One, if WAG reverses course and strikes a deal with ESRX. Second, if the Medco deal goes through ESRX should be able to improve their margin through economies of scale.

  • Report this Comment On January 11, 2012, at 6:25 PM, Carioca58 wrote:

    @kmamm

    MF is a business about selling information. Separating what is advertisement and what is not is irrelevant. Unless you can call an article dishonest (or incompetent), you can't complain. It is up to you to sort through the information what helps your investment strategy or not.

  • Report this Comment On January 13, 2012, at 6:32 AM, Sbparkinson wrote:

    nuance is a very innovative and smart company which doesn't let any grass grow under it's feet.

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