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.

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.

Conceding nothing
Oil drillers run into dry wells from time to time; it's part of the business. Hyperdynamics, which is searching for oil off the west coast of Africa, where it owns a 9,600-square-mile concession, ran into a dry well recently and its already-under-pressure stock collapsed even further.

While a dry well might be a risk of the business, Hyperdynamics' problem seems twofold. First, it reported much wider losses last quarter as costs of the drilling program escalated, which, combined with limited cash resources, strains its ability to function. Second, the dry well it drilled wasn't exactly dry: It showed traces of hydrocarbons that suggested the oil that had been present either leaked out or was really just a sign of a migratory pathway to some other location.

Like CAMAC Energy and Vaalco Energy, Hyperdynamics is hoping the waters off Africa's west coast ultimately prove to hold a treasure trove of oil. Nexen's found oil there and Total just opened a field offshore Nigeria. But the driller admits that it knows of only one exploratory well drilled in the area of its concession, and that one turned out to be dry as well.

With 9,600 acres to search, it's possible it's going to find oil somewhere. The Sabu-1 well it drilled was done under pressure of meeting a deadline. As part of its concession agreement, it had to start drilling by the end of last year, so the spot it chose may not have been the best, just the best it could find in the time available. It's got to drill another one by 2016, so that should give it a lot more leeway in finding a more viable location, but while searching for that needle in a haystack, its cash position is going to be strained further.

That's probably why less than 40% of the CAPS All-Stars rating Hyperdynamics think it will outperform the market any time soon. Add Hyperdynamics to your watchlist to see whether it can outrun the clock that's ticking down against it.

Seeing more clearly
Even if mobile carriers are reluctant about shelling out too much for capital expenditures right now, the growth in mobile computing and communications is going to require that they eventually upgrade their systems. That's partly the reason Verizon continues to roll out its FiOS upgrades in areas previously identified for the service even as they've essentially cut off other regions from consideration.

That bodes well for optical networking companies, like industry leader Finisar and Oclaro, which was negatively affected by the flooding in Thailand and expects to be at full production again by the end of this month at three of its five facilities. Yet the field is highly competitive and Oclaro may have vaulted itself into a better spot to gain the most benefit by agreeing to buy rival Opnext (Nasdaq: OPXT). It will become the second-largest optical networking specialist, just behind Finisar but ahead of JDS Uniphase.

CAPS member FairOakInvest already believes its new product introductions alone made Oclaro a competitive threat, and while its low two-star CAPS rating suggests the investment community believes there are better places to put your money these days, its broader capabilities as a result of the merger may help opinion expand further too.

Add Oclaro to the Fool's free portfolio tracker and give us your thoughts on the Oclaro CAPS page as to whether this will lead to additional consolidation in the industry.

There's no need to fear...
Underdogs often shine brightest with their backs against the wall. Still, it takes more than reviewing a few All-Star picks and reading 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.