Surprising Low-Rated Stocks the Leaders Love

Piggybacking on the picks of great investors and money managers can often lead to big rewards -- especially when the stocks in question are beaten down. If Warren Buffett's buying railroads, perhaps you should look there, too. Does Bill Miller think financial stocks are beaten down? Maybe investigating more closely will help improve your own results.

Over on Motley Fool CAPS, our All-Star players represent the best 20% of more than 85,000 professional and novice investors. I'm looking among them for those who've chosen one- and two-star stocks to outperform the market. The majority of CAPS investors may consider these stocks losers, but if our ace contrarians think otherwise, these picks might be worth a look.

Here are a few stocks that have gotten the nod from the best of our CAPS investors:

There's typically a low-rated stock that has also enjoyed a large one-year run-up in its stock price, leaving me leery. Sure, stocks can continue to run, but these picks' high valuations -- and low ratings -- leave me cold. Not so this week, as the best that we can point to as a run-up would be Internet access provider EarthLink.

Although there was a brief time at the start of the Internet boom when I had an account with EarthLink, that time is long gone. I think the ISP's time has passed, too. It's even thrown in the towel on its municipal Wi-Fi access bet after losing $80 million last year. Whether it can stem the hemorrhaging of its own customers is debatable.

Peeking over the shoulder
Though I think Pier 1 has done an admirable job of reinventing its product lines to make them more desirable to consumers, the current state of housing and the economy would suggest that its time for a rebound has not come just yet.

The company I see with perhaps the greatest potential is Evergreen Energy, which cleans up coal to make it a lower-emissions fuel. There are conflicting signs of whether we are in the midst of a coal boom or a waning of coal demand. Much of the debate about the merits of coal as a fuel swirls around the purported greenhouse gas effects produced by burning coal. Which is why Evergreen Energy's technology might play an important role.

According to a report in today's Christian Science Monitor, the Department of Energy has seen some 45 coal plants in development put on hold over the past year as natural gas has become a prime alternative energy play. Yet if prices for natural gas rise, coal may remain an attractive alternative. Some companies are seeking to tap the CO2 emissions of coal-fired plants to sell to oil companies, which would use them to help extract oil from the ground. Denbury Resources (NYSE: DNR) already does that sort of thing with its large, naturally occurring CO2 field near Jackson Dome, Miss.

In making his pitch for Evergreen Energy just last weekend, top-rated All-Star jwfoster points not only to Evergreen's technology as making it a potential winner but also to an international clamor for coal that could offset any sagging domestic demand:

Coal produces bad emissions and is dirty. Evergreen's coal additives reduce coal emissions by about 80%. ... Asian countries are [interested] in utilizing Evergreen's technology. ... [T]he power [coal] supplies to the world is too crucial to ignore the fact that coal will be a primary energy source for the next 30 years. However, everyone will want clean coal additives and technology. Evergreen will be a part of that solution as states force coal plants to go clean.

On the other hand, All-Star Gtrinvestor finds the expense of making coal clean too great to afford, and, matching that with Evergreen's fundamentals, thinks the company might not do so well after all: "Yes, everyone loves clean energy, if they can afford it, which won't be so easy in the coming recession. 2 thumbs down out of 3, b/c this one will be issuing more stock and trying to borrow more money in the next year (in this horrible credit market) just to stay afloat."

Finding value under rocks
So there you have it -- five low-rated laggards that have gotten big endorsements from some of the best and brightest investors in the CAPS community, although there are always some who are not so sure. If you want to add your two cents on these or any other companies, sign up to join Motley Fool CAPS, absolutely free.