Are These Underdogs Really 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.

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. And don't end up with fleas by lying down with these dogs until you do your homework.

Day old joe
The bear thesis for specialty coffee maker Green Mountain Coffee Roasters (Nasdaq: GMCR  ) is well-known these days: Losing patent protection, the bottom is dropping out as cheaper third-party K-Cups hit the shelves -- supermarket chains Kroger and Safeway already have their own K-Cups hitting the shelves, as does Costco -- while sales channel issues and suspect corporate governance keep it low today. Of course, with shares down 56% so far this year and more than 80% off their highs, it would be fair to assume the bottom has already fallen out for this once high-flying stock, but short-sellers think there's a lot more room to fall.

While Foolish writer Danny Vena has outlined virtually all of the issues hanging around Green Mountain like an albatross here, some investors think there is still a bull argument to be made. For example, it has confounded analyst expectations by continuing to post rising revenue and profits even as the stock has fallen and at less than seven times earnings estimates, there's a case to be made that it's cheap -- even cheap enough to be bought out by a rival. Starbucks (Nasdaq: SBUX  ) , which is also entering the K-Cup fray and on the acquisition path, is the logical choice.

CAPS member RhodeIsland says falling prices may actually lead to a Green Mountain renaissance as new consumers flock to the company synonymous with single-serve coffee: "The patent expirations are going to ding earnings, but aren't going to destroy the business! In fact, lower pod prices may cause more homes & small offices to adopt single-serve as it will be more affordable."

Unfortunately, I think it's become something of a "cigar butt investment," one you might pick up from the gutter where it's been tossed to get a few more puffs out of before you throw it in the ash heap yourself. Office sales of K-Cups are slowing, and Wal-Mart is bringing its own brewing machine to market. The competition that built up behind the patent dam is starting to burst through and Green Mountain will be washed away, which is one of the reasons I've had a long-running underperform rating on it on CAPS.

You can follow its sales and competition by adding Green Moutain to the Fool's personalized stock tracking service, and let us know in the comments section below or on the Green Mountain Coffee Roasters CAPS page if the stock has any reason to perk up.

Anti-social behavior
China's social network site Renren (Nasdaq: RENN  ) is another stock I figured was overvalued for a long time, but if analysts suggest that its current stock price weakness is the result of the debacle surrounding Facebook's (Nasdaq: FB  ) IPO and resulting sagging shares, well... that's just ludicrous. Maybe investor sentiment is that lemming-like, but other than having similar businesses, one really shouldn't affect the other.

The country's demographics make it tempting to think Renren can capture the same growth trajectory that Facebook has. The government-run China Internet Network Information Center crossed the half-billion users mark last year, and it's estimated they'll hit 620 million users by the end of 2012. Renren reports its number of active users stood at 154 million at the end of March, up from 147 million in December, and monthly unique log-in users jumped 29%. So the potential for growth is there.

But China is walled off to Facebook, and despite that, those rates of growth are slowing from prior quarters. Those unique log-ins are actually down from the 46% growth achieved in December while its costs are accelerating at a pace far in excess of its revenue growth. With a lot of cash on hand, though, and no debt, I don't see it crashing and burning, but I also don't see it outperforming the market indexes.

But CAPS member Loerke says if analysts want to compare it to Facebook, then look at how the market is valuing the two since RenRen is "selling at only 2x book value; compare Facebook at 11x book." And the government's got its back.

Add Renren to the Fool's free portfolio tracker, and tell me on the Renren CAPS page whether analysts are skewed in their opinions and aren't focusing on what's important to this particular stock's business.

There's no need to fear...
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Fool contributor Rich Duprey holds no position in any company mentioned. Click here to see his holdings and a short bio. 

The Motley Fool owns shares of Starbucks, Costco Wholesale, and Facebook. Motley Fool newsletter services have recommended buying shares of Green Mountain Coffee Roasters, Starbucks, and Costco Wholesale. Motley Fool newsletter services have recommended writing covered calls on Starbucks. Motley Fool newsletter services have recommended creating a diagonal call position in Wal-Mart Stores. Motley Fool newsletter services have recommended creating a lurking gator position in Green Mountain Coffee Roasters. The Motley Fool has a disclosure policy

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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