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. You'd be up another 43% if you'd followed David Dremen of Dremen 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 4,700 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 Buffett, Lynch, or Dremen 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 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 four one-star stocks have gotten the nod from the cream of our CAPS All-Stars:

I'll have to admit that the value investor in me can't get beyond the large run-ups in both Weyerhaeuser's and GM's stock, and the financial problems at the automaker leave me cold right now. Although I'm a Sirius subscriber, I think it also has some financial issues that only the doubtful merger with XM could perhaps cure.

Finding value under rocks
While those of you who've read my prediction of satellite radio's demise might find it surprising, I'm actually viewing one half of the heavenly duo as perhaps having the most potential here. XM certainly didn't win many kudos from listeners when it suspended the on-air personalities Opie and Anthony for making some off-color remarks. This is satellite radio, after all, where you're supposed to be able to express yourself in a no-holds-barred fashion. And subscriber numbers have been difficult to boost these days, so we'll probably see some higher churn this quarter because many O&A fans canceled their subscriptions, and XM was forced to offer subscription extensions to appease them.

Still, even as I've said satellite radio needs to resist the urge to become more like terrestrial radio, the bigger, more financially secure XM has the best chance to succeed ... if it survives. A merger would help end the internecine battle it's engaged in with Sirius, but whether the Federal Communications Commission is willing to overlook the companies' charters, which expressly prohibit such a pairing, is doubtful. Some smart Fools doubt XM won't flame out, but as we see below, some think it will survive.

For example, CAPS All-Star bl400 says demographics are in its favor:

I feel that XM is a long-term hold and that they were overvalued when they reached their highs last year. They're pulling in lots of younger subscribers (under 35), which will help set a nice install base for the future. They'll have bumps for the simple fact that they are in debt, but that debt should really start decreasing within the next year or 2.

Another All-Star, Zhuren, who has a rating better than 93% of all CAPS investors, says:

This baby is going to be producing some significant free cash flow three years out from now ... whether or not it is currently a little pricey, its current price is a screaming bargain for where they will be three years from now. Also, it only has one direct competitor. That's a good thing.

It's your turn
So there you have it: four 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 XM still get a signal, or will GM avoid the potholes? If you want to add your two cents, sign up to join the Motley Fool CAPS community, which is 100% free.

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.