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 Buffett finds opportunity in bonds, 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 more than 110,000 professional and novice investors. I'm looking amongst them for those who've chosen one- and two-star stocks (out of five) to outperform the market. Most CAPS investors may consider these stocks losers, but if our ace contrarians think otherwise, these picks might be worth a look.

A few stocks have gotten the nod from the cream of our CAPS investors:

Source: Motley Fool CAPS; Yahoo! Finance.

A flood of opportunity
It might not operate riverboat gambling operations, but Isle of Capri Casinos evokes historic gaming images in its series of casinos along the Mississippi River in Louisiana, Mississippi, Missouri, and Iowa. Of course, with the Big Muddy as your backdrop, the possibility of flooding is great, and Isle of Capri had to shut down a couple of its casinos when the river overran its banks this spring.

A sour economy has increased competitive pressures for gambling dollars. Las Vegas remains a prime destination for gamblers, and while Las Vegas Sands (NYSE:LVS), for example, might seem one to benefit as a result, there's a greater reliance on food and entertainment as a source of revenue, which makes casino operators in Las Vegas more sensitive to the dour economy. Isle of Capri Casinos has also suffered from greater competition along its riverbank properties.

Not everyone is convinced that a down economy spells doom for Isle of Capri. Top-rated CAPS All-Star VATROSLAVJG goes along with the conventional wisdom that when times are tough, gambling is one business that continues to thrive:

People may not have much disposable income, but whether times are good or bad, you can count on gaming. This stock is undervalued right now and should make up some ground.

A regional malaise
Financial stocks, and regional banks in particular, continue to be buffeted by the decline in the real estate market as the institutions are forced to write down ever greater amounts of properties in their portfolios. KeyCorp has been struck by the subprime market's implosion, which -- together with an unfavorable tax ruling -- caused it to slash its dividend and turn to the capital markets to raise cash to bolster its balance sheet.

While such maneuvers lower valuations, some top-rated investors like CAPS All-Star jester112358 also sees it as a reason for investors to exit the stock en masse:

These regional banks all have been cutting dividends to raise capital to cover bad loans. Also diluting shares. Shareholders will continue to head for the exits.

Still, All-Star EnochRoot finds the disparity between valuation and historical benchmarks so far over the line that these institutions are bound to bounce back strongly:

The decline been so bad in the bank group that the BKX Index is now 24% under its 200-day moving average. That's an extraordinarily large spread that has been seen only five other times in its history. ... All were within a day of a major low and a month later the index was higher by [between 7% and 33%]. I am using CAPS to track the BKX constituents over the next month, to see if this historical technical pattern will hold even in this crappy credit environment.

Finding value under rocks
So there you have it -- five low-rated laggards that have 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 about these or any other companies, sign up to join Motley Fool CAPS, absolutely free.