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 17% gain so far. You'd be up another 50% 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 70,000 professional and novice investors alike have rated more than 5,000 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 one- and two-star stocks have gotten the nod from the cream of our CAPS All-Stars:

When I make this list, I typically find 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 a possible investment. Not that stocks can't continue to run, but their high valuations -- even with their low ratings -- leave me a little cold. Online florist 1-800-Flowers.com, especially considering its stock price, would fit the bill this week.

The same can't be said for United Airlines parent UAL, which, while it has also had a decent run-up in its stock, is mulling over selling off different parts of its business. It might still have legs to run; just don't tell that to its retirees, who had their benefits slashed to enhance the value of insiders' shares.

Yet I find troubled car maker Ford to have the best chance to appreciate more, and not just because I own shares in the company. Despite being a financial wreck these days, with slack sales, declining market share, and upcoming labor negotiations, I think Ford can finally find its way forward. Precisely because it is in distress, the labor unions may not try to -- or be able to -- wrangle the same concessions from Ford as they have from General Motors (NYSE:GM) or Chrysler, which may leave the company better off in the end.

That seems to be the reasoning behind CAPS All-Star SH2F088's position that Ford's way forward is a way up.

I believe the contract negotiations will put F in a position to regain profitability and new CEO will help them find a sustainable niche.

A PE of 7 is typical for F's peak earnings. 7 x the [average earnings] for 04-05 gives a price of $10.3 while the S&P target price is $9 (based on P/S of [0.12]). They rate F a hold.

Top-rated All-Star optionwinners also thinks Ford's turnaround is finally gaining traction, which should bolster its shares in the near term.

The last quarter looked wonderful for the turnaround of this company. The stock has been strong through the downturn. I think that your downside risk is limited and the upside has significant potential. I would start to accumulate this stock. The stock should be over 10 by the end of the year and if the turnaround produces a good next quarter we could see much more.  

Finding value under rocks
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? If you want to add your two cents, sign up to join the Motley Fool CAPS community, which is 100% free.