These 5 Underdogs Are No Dogs

Short-sellers and hedge funds, although sometimes shadowy, are often seen as the smartest guys in the room. They did their homework and will bet their capital against the crowd. It's not the most popular way to go, but the rewards can be quite lucrative.

On Motley Fool CAPS, we've got our own brand of leading analysts who found the chinks in a company's armor and correctly called its fall. "Underdogs" are investors who earned 100 or more CAPS points correctly predicting one or more stocks would underperform the market.

Let's look at some of the recent calls these All-Star investors have made. Yet, just as hedge fund operators don't always go short, we're going to look at recent Underdog picks no matter which way they've called them.

Underdog

Member Rating

Company

CAPS Rating (5 max)

Call

TrackBoASec

93.67

Kraft (NYSE: KFT  )

****

Underperform

JohnnyLC

99.92

KB Home (NYSE: KBH  )

*

Underperform

dplindeman

99.14

Citigroup (NYSE: C  )

**

Outperform

TMFSarahGen

99.86

General Motors (NYSE: GM  )

*

Outperform

BlackEagle7

99.82

American Express (NYSE: AXP  )

***

Outperform

Not every short-sale goes as planned, so it's a risky position to hold. Stock prices can be irrational for longer than you have money to stay in the game. So don't use this as a list of stocks to sell or buy, but rather as the launching pad for further research.

Underdogs still wag their tails
No doubt Citigroup felt that someone did an end run around it when Wells Fargo (NYSE: WFC  ) announced it was going to be the one to pick clean the bones of Wachovia (NYSE: WB  ) instead. Now the Federal Reserve has stepped in to say that the two need to play nice and maybe divide the carcass, but CAPS member AegisPI says the battle over the bank is a sideshow, and that Citibank is a financial institution that is immensely undervalued at these prices:

Doesnt matter if Citi gets Wachovia or not. This stock is seriously on sale. I am willing to bet it will return to its 52 week high in the next year or two.

With the automakers finally able to wrangle their own bailout with $25 billion in below-market-rate government loans to retool for more fuel-efficient cars, it's possible they'll be able to compete more effectively. A number of investors, like CAPS member OtherOracleOfOMA, think General Motors and the other Big Three have pulled up their socks such that their assembly lines are rolling off cars just as good as their rivals':

OK, this is a risky one - I expect GM to be beaten up even more over the next year or so. However, I think they will emerge to absolutely dominate the plug-in gas and CNG hybrid segment over the next few years, which will in turn become the predominant form of consumer vehicle. On top of that, the American automakers seem to have finally gotten their act together. Their new lines are every bit as good as their foreign competitors, and at a significantly lower price.

Speaking of retooling, CAPS member docmai thinks American Express will return to its past ways of outperformance as it refocuses on higher-wage earners, who have been one of the last groups to suffer from large rates of default:

[AmEx] will outperform based on its historic emphasis on higher earners. In this market, it will become more important for these people to use credit. Although they are experiencing a higher percentage of defaults than in the past, I believe this is due to their shift toward a broader market. However, they recognize this and are adjusting their marketing strategy.

There's no need to fear ...
When underdogs have their backs against the wall, that's when they can shine their brightest. It pays to start your research on these stocks on Motley Fool CAPS where your opinion can still save the day. While there you can read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made -- all from a stock's CAPS page. There's more than you think.

On Oct. 7, 2008, Fool co-founder David Gardner and his Motley Fool Pro team will invest $1 million in a portfolio designed to help you make money in any market. In the coming weeks, the team, relying heavily on proprietary CAPS "community intelligence" data, will establish long and short positions in a broad range of securities, including common stocks, publicly traded put and call options, and exchange-traded funds. To learn more about Motley Fool Pro and to receive a private invitation to join, simply enter your email address in the box below.

Kraft Foods is an Income Investor selection. American Express Co. is an Inside Value pick. The Fool owns shares of American Express Co.

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


Read/Post Comments (2) | Recommend This Article (6)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 06, 2008, at 6:40 PM, Alexhorntoad wrote:

    Citigroup is probably priced about right. They will never go back to making the profits they "made" in the past few years because those profits were fake, they never existed despite what their books said. To determine potential earnings, you should add all the earnings for the last 5 years, add the write-offs incurred and that should roughly approximate the earnings for the next five years.

    GM is broke. It's equity is so negative, I can't understand how anyone does business with them. If they started generating profit at the average rate they had during the 10 years before this recession, it would take them 10 years to bring their equity back to zero. At current market prices, Toyota could by all of GM in exchange for 5% of their shares, yet they don't seem interested. Why? Because they don't want 50 billion in extra liabilities in exchange for lazy, fat union workers. They will wait until GM goes broke and then buy the assets that are actually worth something.

  • Report this Comment On October 10, 2008, at 11:12 AM, vest0r2 wrote:

    Citi has a TRILLION DOLLARS in off-balance-sheet debt. How does their stock look with that in mind?

    Too bad about GM. Maybe making crappy cars for decades caught up with them?

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