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 getting punished. 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 top-rated All-Star players represent the best 20% of our 96,000 participating professional and novice investors. I'm looking among the All-Stars for those who've chosen lowly one- and two-star stocks -- out of a possible five in CAPS -- 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:

Company	CAPS Rating (Out of 5)	1-Year Return	CAPS All-Star	Player Rating
H&R Block (NYSE: HRB)	*	1.1%	BigDaddyLG	94.62
Assured Guaranty (NYSE: AGO)	*	(11.6%)	Sloan500	91.02
Avalonbay Communities (NYSE: AVB)	*	(22.1%)	baseballdude	99.40
Steak n Shake (NYSE: SNS)	*	(55.3%)	antusalrodaigh	91.09
Delta Air Lines (NYSE: DAL)	*	(55.8%)	bmohning	95.52

Typically, I'm left leery by a low-rated stock that has also 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. Only tax-prep maven H&R Block is in positive territory -- if only barely -- but it can't be denied that we're right in time for its sweet spot for earnings.

Shakin' and bakin'
Troubled niche restaurants looking for a growth catalyst are seemingly a dime a dozen. Last year, Friendly Ice Cream was melting as its board fought off a hedge fund's challenge to gain control of the company and turn things around. It ultimately agreed to be bought out by a private equity firm. Steak n Shake has more in common with Friendly than might first meet the eye.

Like Friendly, Steak n Shake's management had done little in the way of value creation for shareholders over the years. Shares trade today below where they were five years ago. In addition, the same hedge fund that mounted the campaign against Friendly saw a similar opportunity in Steak n Shake. Sadar Biglari of Biglari Capital did the same at Western Sizzlin -- he gained control of the company, got appointed CEO, and nearly tripled the stock.

His sights are now set on Steak n Shake, and having just staged a coup of sorts by beating the incumbent chairman and former CEO for board seats, he's looking to further shake things up at the restaurant chain. As boards are inclined to do, however, Steak n Shake's has raised a few more hurdles in his path, such as making it more difficult for Biglari to unseat the rest of the board. Yet for investors looking for that often-elusive "growth catalyst," this Motley Fool Hidden Gems Pay Dirt recommendation may now have it, in the form of new top management.

Investors are feeling more inclined to agree these days. CAPS player threeseventeen finds that the chain's assets have been largely untapped, and that unlocking their potential could catapult the stock forward: "It is currently a very poor performer, but its underlying assets are untapped. The recent proxy battle hopefully will move the company's stock price into the $20-$30 range in a couple of years."

FSOAbroad finds the unique theme of the restaurants something that can set it apart from so many other me-too restaurant chains: "A large shareholder has worked his way on to the board and is hoping to shake (no pun intended) things up. It's a tough, competitive industry, but their food is great and they don't have many competitors doing the same thing (50's time diner food) and they have a lot of room to expand in the future."

As All-Star TMFSmashy noted back in January, Steak n Shake has many potential catalysts, and with some metrics that approach those of top-flight chains such as Chipotle Mexican Grill (NYSE: CMG) (NYSE: CMG-B), it is an excellent opportunity:

There appears to be a lot of embedded value here. As mismanaged as it's been, Steak n Shake actually has achieved very high EBITDA/employee, near that of Chipotle. This suggests a restaurant concept that could be expanded very profitably. Combine that with hidden real estate value, and this could be a homerun if Biglari gets on the board of directors.

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.