Surprising Low-Rated Stocks the Leaders Love

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Piggybacking on the picks of great investors and money managers can 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 15% 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 75,000 professional and novice investors alike have rated more than 5,200 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 more. 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 90% or better. Then I searched through this set of players to see who'd chosen one- and two-star stocks to outperform the market.

Why low-rated stocks? Just like the players, stocks receive ratings too, from one to five stars. The majority of CAPS investors may think these 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 five low-rated stocks have gotten the nod from the cream of our CAPS All-Stars:

Company	CAPS Rating	1-Year Return	CAPS All-Star	Player Rating
Ultratech (Nasdaq: UTEK)	*	(9.9%)	wcwhiner	99.91
Public Storage (NYSE: PSA)	*	(18.5%)	celiofonseca	97.28
NVR (NYSE: NVR)	*	(19.8%)	floridabuilder	99.89
Credence Systems (Nasdaq: CMOS)	**	(42.5%)	kevday	98.96
Ryland Homes (NYSE: RYL)	*	(56.1%)	stockgripes	89.92

Typically there is a low-rated stock that's also enjoyed a large one-year run-up in its stock price that leaves me leery of considering it as an investment. Not that stocks can't continue to run, but their high valuations -- even with their low ratings -- leave me a little cold. Not so this week. All of these stocks are posting year-long losses that seem to warrant the low opinion most CAPS investors have for them.

Perhaps more surprising is that homebuilders continue to dominate the list of low-rated stocks suddenly feeling the love. The woes of the housing, mortgage, and credit industries have taken down these sectors dramatically from their previous highs, but some CAPS All-Stars may be thinking the worst is over, and all the negative news about them is already priced into their stocks.

Being tied to the cyclical nature of the semiconductor industry isn't always a prescription for big gains, as Ultratech has found out. This small company, which helps chip makers like Intel (Nasdaq: INTC) stem leaking current in their smallest circuits, has not yet been able to translate a winning technology into a winning stock. Some Fools think investors need patience when it comes to investing here.

Tech analysts and market researchers at NetScribes have underscored this, noting earlier this year that the niche it plays in is marred by easy entry by larger, better financed rivals. Still, its strong patent portfolio may give it the edge it needs.

With 12 years of research expenses on its laser-processing tool, Ultratech has built up a strong patent portfolio for its product, giving it an edge over its competitors. Going forward, the company believes that its laser-processing product will be the major growth engine, thereby boosting its revenues by double-digit growth rate in 2007. With improved manufacturing and installation efficiencies, supported by aggressive cost-cutting measures, profit margins of the company are likely to see an increase in the coming years.

As advanced packaging market is in infant stage, UTEK is strategically focusing on the same. With international operations contributing significantly to its top-line, the increased demand from emerging economies portrays a positive operating environment for the company, going ahead.

According to market researchers at The Information Network, semiconductor equipment manufacturers are expecting the market to grow by 22% in 2008, which ought to help out the likes of Ultratech.

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. What do you have to say? If you want to add your two cents, sign up to join the Motley Fool CAPS community, which is 100% free.