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 have taken a hit. If 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 top-rated All-Star players represent the best 20% of our 100,000 professional and novice investors. I'm looking amongst 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 cream of our CAPS investors:

Typically, when I make this list, I find a low-rated stock that leaves me leery after having enjoyed a large one-year run-up in its stock price. Sure, stocks can continue to run, but these picks' high valuations -- and low ratings -- leave me cold. Not so this week. All of the companies here have suffered appreciable declines in their stock prices. So let's dive a bit further into one of them.

Digging into DivX
Video-software provider DivX makes compression/decompression software -- known as a codec -- that squeezes video into Internet-friendly sizes with little loss of quality. Its wide use in DVD players has allowed DivX to generate 80% of its revenue from licensing its technology to equipment manufacturers.

A year ago, the industry analysts at Netscribes noted that much of DivX's popularity "has been driven primarily by its usage for playing pirated movies, a factor that the company intends to leverage to become a de facto standard for all digital video compression."

Aside from being a fan of those operating outside the legal constraints of the movie-viewing industry, it has had a few other internal problems that have caused it to underperform and has now set itself up to compete head-to-head against Apple (Nasdaq: AAPL).

So why might investors think DivX can turn itself around and surmount such hurdles? All-Star CAPS investor owshx acknowledges that the codec company bit off more than it could chew in the past but has since determined to focus on what it does best. He recommends checking out the compatibility labels you find on DVD players at your local electronics stores. That's where you'll find the DivX name. Whether it joins the realms of, say, Dolby (NYSE: DLB) in becoming a synonym for playback quality remains to be seen. owshx writes:

DivX is a great company that tried to do a little too much. They recently canceled their online video community webpage so that they may focus on their technical business. Next time you go to the Best Buy or Circuit City, take a look at the DVD players. You'll notice next to DVD+-R, HD, and a few other 'compatibility' tags, a new tag for DivX compatibility!

Of course, not everyone is convinced that DivX can make the changes necessary to survive. CAPS investor sgtbunny figures it will go on a slow march into oblivion:

DIVX will continue to drop lower and lower. It had a major crash in late November/December with a failed attempt to spin off or [sell video-sharing site] Stage6 was made. News 2 days ago of the shut down of its highly popular yet highly expensive Stage6 has already yielded a $2.00 drop. Safe bet to keep this one on the downward spiral until it finally dies completely.

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. If you want to add your two cents on these or any other companies, sign up to join Motley Fool CAPS, absolutely free.

Dolby Laboratories, Best Buy, and Apple are Motley Fool Stock Advisor recommendations. Best Buy is also an Inside Value pick. You'll love the 30 days of free stock picks available at any of the Fool's investment services.

Fool contributor Rich Duprey owns shares of Dolby but has no financial position in any of the other stocks mentioned in this article. You can see his holdings. The Motley Fool has a disclosure policy.