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 a roughly 16% gain so far. You'd be up another 50% if you'd followed David Dreman of Dreman Value Management, when he opened a stake in aerospace and industrial products manufacturer Barnes Group at the end of March.

Over on Motley Fool CAPS, more than 74,000 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 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. So 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 six one-star stocks have gotten the nod from the cream of our CAPS All-Stars:

Typically, I'll find a low-rated stock that's also enjoyed a large one-year run-up in its stock price. That usually 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. But this week, all of these stocks have posted yearlong losses that seem to warrant the low opinion most CAPS investors have of them.

Yet one of them intrigues me, because it seems to have cured what ailed it. Vonage was on the brink of going out of existence, so soon after an IPO that itself was something of a wreck. Yet having settled its patent-infringement problems with rivals such as Verizon (NYSE:VZ), perhaps Vonage can now focus on providing its VoIP services to its members.

That's what most of the CAPS investors who are bullish on it seem to believe -- that, and the possibility of a takeover. As burningspleen says, "With the lawsuits behind them, I predict a Verizon buyout announcement in 3 months."

Settling its legal woes doesn't sway many others, though. TMFBreakerJava revels in his numerous bets against Vonage's sustainability.

This is my 17th underperform call on VG, and 16 of them have been right. My 15th call got caught on the upward pop as a result of the settlement with Sprint. However, the settlement does not change the fundamentals at all, just eats into their dwindling cash reserves.

The relentless progress toward zero was foreseen by the wiser Fools from the day of the IPO. VG have been pouring the funds they raised from investors, into advertising in order to get people to pay for a service that is already available for free.

This is as close to a sure thing as the market provides. Rec it while the market cap and price still qualify it for CAPS.

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. It's 100% free!