Low-Rated Stocks That 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.

For example, 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.

Over on Motley Fool CAPS, more than 31,000 professional and novice investors alike have rated more than 4,700 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 the names of Buffett or Lynch yet, but their records are remarkable all the same.

The best of the best
Each All-Star boasts 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 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 five one-star stocks have gotten the nod from the cream of our CAPS crop:

I have to admit that the value investor in me can't get beyond the huge run-up in Crocs' stock or the fact that I see it as something of a fad. Then again, I thought Deckers' (NASDAQ:DECK) Uggs boots were a fad and sold my holdings -- just before it proceeded to double in price.

Despite its reported revenues and earnings growth last month, I find myself siding with another All-Star,wcwhiner, who writes:

CROX stock has run hard on impressive growth. If I believed the growth were set to continue, I might be going long, since its multiples aren't that crazy, considering how hard it has run, its enviable margins and its rather impressive ability to ride a trend. However, nothing goes up forever, especially in the consumer space. Since I continue to work on a "soft landing includes the word 'landing' " thesis on slowing economic growth, and since consumption is levered to growth, I wanted to add a couple reversal plays levered to consumption. Reversals are the hardest trades to get right, and among the most punishing to get wrong, so I am not short or buying puts in real life. Here, fingers crossed I ticked this one correctly.

Finding value under rocks
Instead, I find myself leaning toward mortgage lender Countrywide Financial. Undoubtedly this stock has been struggling as a result of housing market woes followed by the implosion happening in the subprime mortgage market. Yet as the largest mortgage lender with actually relatively little subprime exposure, I think Countrywide has a great chance to be a winner again when -- not if -- the housing industry recovers.

In fact, many of the top CAPS investors have similar thoughts here.

Jeffreyw notes "What was I thinking? Oh yeah, if ANY mortgage lender can survive these times, it should be CFC, the largest in the country with a solid portfolio of prime loans and little exposure to the subprime mess."

That's echoed by osborta who says "CFC will be lumped in with the 'subprime' lenders. In fact, it may be able to purchase at a nice discount some of those assets from companies that don't make it to the other side," while top-rec'd bull icon149 opines that Countrywide has been "beat up over sub prime, but little exposure, presents buying opportunity, and when the smoke clears CFC will have fewer competitors and a larger market share."

It's your turn
So there you have it, five low-rated stocks 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 housing build itself back up? Is the elder statesman of the automotive industry ready to rev its engines? Are fad shoes just a crock? If you want to add your two cents, sign up to join the Motley Fool CAPS community, which is 100% free.

Amazon.com is a recommendation of Motley Fool Stock Advisor. A free 30-day trial lets you see the other surprising picks that are currently beating the market by 37 percentage points.

Fool contributor Rich Duprey owns shares of Ford and wishes he could have his shares of Deckers back, but he 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.