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 20% gain so far. You'd be up 33% 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 76,000 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. 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 low-rated stocks have gotten the nod from the cream of our CAPS All-Stars:

Typically, at least one low-rated stock has also enjoyed a large one-year run-up in its stock price, which leaves me leery of considering it as a possible investment. Sure, these stocks can continue to run, but their high valuations -- even with their low ratings -- leave me a little cold.

Not so this week. All of the stocks are posting yearlong losses, which seem to warrant the low opinion most CAPS investors have of these companies.

Perhaps more surprisingly, some financial institutions find themselves on the list of low-rated stocks suddenly feeling the love. The woes of the housing, mortgage, and credit industries have dropped these sectors dramatically from their previous highs, but some CAPS All-Stars apparently think that the worst is over, and that all the negative news to be found in these firms has already been priced into their stocks.

Reeling in the movie loop
Movie-rental maven Blockbuster has been taking it on the chin from several fronts, from its knock-down, drag-out fight with online rival Netflix (NASDAQ:NFLX) to the oncoming threat of video on demand (VOD). Meanwhile, kiosk movie rentals, such as those provided by RedBox -- a joint venture between McDonald's (NYSE:MCD) and Coinstar -- are nibbling away at its edges.

Still, investors may very well see changes in the rental house, and perhaps in the stock price, too. In addition to making over its stores -- perhaps a latte with your rental? -- Blockbuster is investing heavily to make itself look more hip, and exploring the future of movie rentals. Downloading your fave feature may be the ticket stub to higher growth.

That's what CAPS investor TMFHollywoodDan thinks, particularly since he considers CEO James Keyes a "visionary" who can build a defensible moat around his "castle."

It's simply time to stop hating this company. Keyes is a visionary, and I feel certain that he will give people a reason to come to the stores. He also has shown through 7/11 that he can develop flexible business models that work in each region. So, if electronic products sell in the West, but the Mid-West crowds prefer coffee and kids playgrounds, I think he will be able to pull this off. If he comes clean and admits they used to fleece customers but won't any more, this could be a monster stock over the next five years. I think they found the Keyes to the castle.

Finding value under rocks
So there you have it: five low-rated laggards that have gotten a big endorsement from some of CAPS' best and brightest investors. 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.