Surprising Low-Rated Stocks the 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 about an 18% 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 73,000 professional and novice investors alike have rated more than 5,200 stocks, indicating whether they think those companies will beat the market or lose to it. The best investors, those who outperform their peers consistently, 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 are 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:

Typically, there is a low-rated stock that's also enjoyed such a large one-year run-up in its stock price that it leaves me leery of considering it as a possible investment. Not that stocks can't continue to run, but high valuations -- even with low ratings -- leave me a little cold. But this week, only InterOil has any sort of appreciable gain, and it's not so large that I might get dizzy.

Yet it's also a company that has some of the top CAPS All-Stars squaring off against one another. On the bull side, PauvrePapillon, with a 99.77 player rating, is taking the tack of following the leaders -- in his case, oil maven T. Boone Pickens.

Most CAPS All-Stars don't like IOP, but Boone Pickens does and Boone (i) [has amassed] a personal fortune of well over $3 billion; (ii) has been on a roll these past few years; (iii) arguably knows as much or more about the energy sector than anybody; and (iv) unlike most CAPS All-Stars, he plays with real money.

Since he has recently increased his IOC position, it's safe to say Boone is pretty confident he knows what's going on over there. History has shown that you can lose a lot of money betting against Boone Pickens. I prefer to take my chances throwing in with The Legend and betting against my CAPS compatriots on this one.

Stepping up for the bear argument is TheGarcipian, with a 99.85 rating, who doesn't find much to like in the murky details or the negative numbers.

Negative numbers on all substantial measurements. Doing work in Papua New Guinea; quite a far-away place and possibly very difficult to track exactly what is going on inside this company. I have a sneaking suspicion that this company is not as up-front as it could be. Thumbs-down.

Finding value under rocks
So there you have it: five low-rated laggards with big endorsements from some of the best and brightest CAPS investors. What do you have to say? To add your two cents, sign up to join the Motley Fool CAPS community, which is 100% free.