Are These Tech Underdogs Really 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 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.

The smartest guy in the room
Just because Amazon.com (Nasdaq: AMZN  ) has become the go-to place to buy ... well, anything, it doesn't mean it's also the place you have to put your money when you invest. Sure, the bookseller has gone way beyond its roots, but the market has done an equally impressive job of pricing all those advances into the stock. Amazon's never been cheap, but investors might be right to be wary of a company this long in the tooth that's still sporting nosebleed valuations.

Yet Amazon has always found a way to confound the skeptics. Its Kindle came to redefine a technology, and while additional iterations have sought to challenge Apple's (Nasdaq: AAPL  ) tablet, itself a redefining technology, it may be extending itself beyond what it is capable of.

The rumor of an Amazon smartphone has certainly shaken things up, with analysts speculating that it could indeed take on the iPhone. As Motley Fool writer George Liu writes, analysts believe it will be an aggressively priced handset much in the way the Kindle is a money-loser to drive sales to content. Where carriers have to subsidize the cost of an iPhone, they'd probably be willing to carry the low-cost smartphone, which in turn "would most likely make accessing Amazon's digital content offerings significantly easier for consumers."

Yet Evan Niu doesn't necessarily see any advantage. He argues that where books and video might work on the Kindle, the greatest content on an smartphone is in the form of apps, and he sees an Amazon handset lagging behind Google, Microsoft (Nasdaq: MSFT  ) , and even ailing Research In Motion (Nasdaq: RIMM  ) .

And the dumbest
A lot of times when a marquee brand steps into an arena, it's easy to think that it will come to dominate the space, or at least elbow out some of the other competitors. But as the experience with Nokia  (NYSE: NOK  ) shows, that isn't always the case, and Nokia highlights how once formidable companies can be reduced to rubble.

If anyone should have dominated the smartphone market it was Nokia, still the world's largest handset maker but one that's quickly moving to irrelevance. Indeed, it may not even be able to survive much longer. It stumbled badly several years ago with failures to introduce models that were popular with consumers and coasted by resting on its laurels of being biggest in the world. Too late did it start trying to innovate, and now the smartphone market has passed it by.

Like RIM, it is trying to make up for lost time by announcing a willingness to sell part of itself to the highest bidder: RIM wants to spin off the BlackBerry division, and Nokia wants to sell some of its patents.

There's a reason CAPS member bIlluminati believes Nokia is now caught in a "death spiral," and while no one is suggesting Amazon is anywhere near such dire straits, a stock that's trading at around 200 times its earnings and getting into the game so late as Amazon is might be poised to stumble mightily.

Might, because as I noted before, Amazon ha often traded at nosebleed valuations and has regularly found a way to turn analyst expectations on their head. Right now analysts are merely speculating on what an Amazon smartphone will look like and do, and I have this feeling that Jeff Bezos will once again upset Wall Street's apple cart.

As BrockMont writes, "this is a company that is just amazing and continues to bring in more and more ways of creating huge profits."

You can follow the development of the smartphone by adding Amazon.com to the Fool's personalized stock-tracking service while also keeping track of Nokia's dwindling relevance, and let us know in the comments section below or on the Amazon.com CAPS page whether you think the stock will hang up on Wall Street. Or to get a handle on what some investors regard as the greatest opportunity in the stock market today, grab the Fool's new premium research report on Apple.

There's no need to fear ...
Underdogs often shine the brightest with their backs against the wall, but the analysts at The Motley Fool have come across a different stock that have them so excited they've dubbed it "The Motley Fool's Top Stock for 2012." A special free report for investors to uncover this up-and-coming player is available to access right now and highlights a company that is revolutionizing commerce in Latin America. Get instant access to the name of this company.

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 Microsoft, Amazon.com, Google, and Apple. Motley Fool newsletter services have recommended buying shares of Apple, Google, Microsoft, and Amazon.com and creating bull call spread positions in Apple and Microsoft. We Fools don't 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. The Motley Fool has a disclosure policy.


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  • Report this Comment On July 10, 2012, at 8:53 AM, deliriesdunn wrote:

    I am a contrarian investor. Here is what we do: After Due Diligence, we decide to buy a stock. If shares go down we buy more. If shares keep going down, we add more...Lets say you average down: $9, $5, $4 and $3, but it goes down to $1.

    Scary, don´t you think?

    Not really...if did your homework and you are TRULY a contrarian investor, not one of THOSE who just talk about it here, you will NEVER think you are betting against the odds, you will think that you are betting against most investors, who, you think, are wrong.

    Lets take Ruby tuesdays in the last months of 2008 & first months of 2009. I think the price went down to $0,95. I stopped buying at $2 and sold later at $9, aprox. My average price was about $4. Far from perfect timing, I know.

    Now, you can bear this is because your DD tells you that RT is worth much more than it´s market price says... no matter what others think.

    Now read almost any article, and you will find how basic human behavior works, ALWAYS:

    For any analyst, to keep is job and/or reputation, it is much better to be wrong on AAPL than to be wrong on Nokia. Why? I guess I do not need to answer that.

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