Surprising Low-Rated Stocks 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 you'd bought Ingersoll-Rand when Warren Buffett announced his small stake in this industrial company last February, you'd be enjoying a roughly 28% gain so far. You'd be up another 43% if you'd followed David Dreman of Dreman Value Management into aerospace and industrial products manufacturer Barnes Group at the end of March.

Over on Motley Fool CAPS, more than 60,000 professional and novice investors alike have rated more than 4,900 stocks, indicating whether they think those companies will beat the market or lose to it. The best investors, those who consistently outperform their peers, are considered All-Stars. They might not match Buffett, Lynch, or Dreman yet, but their records are remarkable all the same.

The best of the best
All-Stars each boast a CAPS rating of 80% or higher. That's plenty good, but I wanted to see which companies the very best All-Stars were choosing. I searched CAPS for players with a rating of 95% or better. Then I searched through this set of players to see who'd chosen one-star stocks to outperform the market.

Why one-star stocks? Just like the players, stocks receive ratings too, from one to five stars. The majority of CAPS investors may think these one-star stocks are dogs, but our top All-Stars believe they'll have their day. It's a typical contrarian investor concept -- what value investing legend Benjamin Graham called "picking up cigar butts."

These one-star stocks have gotten the nod from the cream of our CAPS All-Stars:

In past weeks, I have usually found a low-rated stock that has had a large one-year run-up in its stock price, making me leery of considering it as a possible investment. It's not that stocks can't continue to run, but their high valuations -- with low ratings -- leave me a little cold. Not so this week. Even though Dell has appreciated 23% over the past year, it has been considered a demoralized company for awhile now, and it could very well still have room to move.

No, this week's scary stock for me is subprime mortgage lender Fremont General. While I like the idea of looking in beaten-down industries -- I've even bought a homebuilder in recent weeks for my personal portfolio -- this segment is still going through the throes of a shakeout. Fremont got an infusion of cash when it sold its commercial lending business to Motley Fool Income Investor recommendation iStar Financial (NYSE:SFI) in May, but with a potential credit crunch looming for subprime lenders, it could be a high-risk play.

Finding value under rocks
Investing in Vonage seems to mean simply hoping against hope that one of the poster children for failed IPOs can somehow come back. That leaves us with chip maker AMD and investment banking firm Bear Stearns. While Bear's hedge fund activities got caught up in the subprime meltdown, there seems little reason to fear that this will spiral out of control and sink the entire firm, which makes it an interesting opportunity.

Yet to my thinking, AMD might be the better investment here. Forever playing second fiddle to Intel (NASDAQ:INTC), it's also getting caught in the slowdown in the chip-equipment market. Often, it has better-performing chips than its death-cage rival, but Intel's latest iteration supposedly allows it to take back the lead.

AMD CAPS bull msrs2k sees the next generation of chips as pulling the company up, though Intel's own improvements make a long-term play dicey:

AMD should benefit in the second half of 07 from the introduction of Barcelona and other K10 based cores. That is assuming that this benefit isn't already priced into the stock at around $13.50. I expect the K10 family to bring AMD into price/performance and performance/watt parity with Intel's Penryn processors due in Q4. This should serve AMD well until mid 08 when Intel releases Nehalem, at which time all bets are off.

Another CAPS investor, SoImmature, acknowledges AMD's chip superiority and thinks current weakness has more to do with its acquisition of ATI than anything else:

AMD's setback caused by its acquisition of ATI provided an opportunity for Intel to eat AMD's lunch. The stock has plummeted over 60% since February 2006.

But let's not forget that the $40 per share price tag was well deserved -- before Intel released their 65nm processors, AMD's processors were widely regarded as far superior to Intel equivalents.

In the long run, I think AMD will once again give Intel a run for their money in the processor market, and the ATI acquisition could provide some excellent opportunities for new technology.

Buy AMD while it's still cheap and Wall Street hates it. It won't last long.

It's your turn
So there you have it -- five low-rated laggards that have gotten a big endorsement from some of the best and brightest investors in the CAPS community. What do you have to say? Will AMD once again jump ahead of Intel? If you want to add your $0.02, sign up to join the Motley Fool CAPS community, which is 100% free.

Dell is a recommendation of Motley Fool Stock Advisor and Motley Fool Inside Value. Intel is also an Inside Value pick. You can check out a 30-day risk-free trial subscription to any of the Motley Fool's newsletters by clicking here.

Fool contributor Rich Duprey owns shares of Intel, but does not have a financial position in any of the other stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.