Surprising Low-Rated Stocks Leaders Love

When you piggyback on the picks of great investors and money managers, you can often find 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 gain of roughly 20% so far. You'd be up another 40% 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 65,000 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
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 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 one-star stocks have gotten the nod from the cream of our CAPS All-Stars:

When making this list, I usually 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 an investment. Not that stocks can't continue to run, but high valuations with low ratings leave me a little cold. Not so this week. Other than the paltry gains made by the automakers, there aren't any candidates for runaway stock of the year here.

While Thornburg Mortgage stock is up more than 40% over this past month, shares were hammered so much that the stock is still only half the price it was just two months ago. Is it still too soon to hope for a housing-industry turnaround?

Internet telephony service provider Vonage seems to be another candidate for "too early to hope for the best" award. After a less-than-auspicious debut, the stock simply trades lower and lower. Its latest earnings report did nothing to help alleviate the thought that its subscriber base is dwindling, and the stock warrants are trading in penny stock land. UTStarcom is interesting the way car wrecks are interesting: You shake your head in disbelief and sorrow for what might have been.

Flat tires or engines revved?
Which brings me back to the car makers. General Motors stock has been on a roller-coaster ride this past year; despite an 11% return, it's lower than where it was in July. Another automaker, Ford, has been unable to find its way forward with any of its turnaround plans and now rests its hope on a new president. Both hope that a pact with labor unions for creating a health-care trust fund like the one Goodyear (NYSE:GT) carved out with its workforce will save them much-needed cash.

For that reason, GM looks to be the bargain here. The trust-fund idea seems to have everyone's endorsement, so only the details need to be finalized. That ought to provide additional impetus to the company's stock. Even Ford might be able to tag along for the ride. While two-thirds of the 1,900 investors who have rated the stock think it will underperform, those who mark it to beat the market are also counting on the interest rate cuts to boost things.

CAPS player InvestorDeb thinks with the rate cuts the bottom has been reached.

I think GM is putting in a bottom here. Auto makers will benefit from a coming rate cut and will be able to strong arm unions into concede or die labor negotiations later this week.

But All-Star jester112358 says alternative energy cars will put GM over the top.

O.K. here's my "value" play for the day and why. One concept: plug in electric cars, namely the VOLT. GM is leading the industry in plug in electrics which for city driving (<30 miles) use no hydrocarbon fuels (think upcoming carbon credit market) They use a gas engine just if the batteries need recharging and then have a cruising range of over 600 miles. The key is the development of lower cost Li ion batteries (not easy by any means, but so profitable that it will happen) Soon (i.e. many many years) everyone will be driving one of these babies listening to their ipods and surfing the net using their iphones and calling friends using skype. This is the kind of visionary thinking that's very unexpected from GM, but hey, they're desperate!

Of course, with so many investors aligned against the automaker, not everyone sees positive results from these developments. In fact, the credit crunch is considered the biggest impediment to growth. CAPS investor jstegma points out that not only does GM face formidable competition from the Japanese, but the mortgage industry meltdown will hamper recovery.

The other problem with GM is the end of the "home equity ATM" game. When house prices appreciated, people had extra money coming in the form of home equity loans and cash out refinancing and whatnot. Well, that ATM has been shut down. What's left is to pay back the loans now. People aren't going to be wanting to replace their relatively new cars and make car payments on top of paying off their loans. The tightening of credit will simply make people more frugal. They will soon learn that a car can easily last for 10 years or longer, and that you can save a heck of a lot of money by not replacing it every few years. GM has lost money during the good economic times of the housing boom with 4.5% unemployment and easy credit, but the good times won't last forever.

You can find his full, thoughtful opinion on GM here.

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? Add your two cents. Sign up to join the Motley Fool CAPS community, which is 100% free.