Piggybacking on the picks of great investors and money managers can often lead to big rewards -- especially when the stock picks in question are getting punished. If Warren Buffett's buying railroads, perhaps you should look there, too. Does Bill Miller think financial stocks are beaten down? Maybe investigating more closely will help improve your own results.

Over on Motley Fool CAPS, our top-rated All-Star players represent the best 20% of our 82,000 professional and novice investors. I'm looking among their ranks for the ones who've chosen one- and two-star stocks to outperform the market. The majority of CAPS investors may consider these stocks losers, but if our ace contrarians think otherwise, these picks might be worth a look.

These five low-rated stocks recently got the nod from the cream of our CAPS investors.


CAPS Rating

1-Year Return

CAPS All-Star

Player Rating

Pharmion (Nasdaq: PHRM)





Uranerz Energy (AMEX: URZ)





New York Times (NYSE: NYT)





Alesco Financial (NYSE: AFN)





Midway Games (NYSE: MWY)





Typically, this list will include a low-rated stock that has enjoyed a large one-year run-up in its stock price. Sure, stocks can continue to run, but the combination of high valuations and low ratings leaves me cold. This week, Pharmion is our big gainer. It has more than doubled in price over the past year, but that has just as much to do with Celgene's (Nasdaq: CELG) offer to buy out the company as with its drug pipeline. There doesn't seem to be much upside left here, with the stock trading about $4 below the buyout offer of $72 a share and the deal set to close by the end of the second quarter.

Something's not REIT
More interesting, perhaps, is the case for Alesco Financial, a real estate investment trust that invests in a melange of risky debt instruments, such as collateralized debt obligations and mortgage-backed securities. According to the Organization for Economic Cooperation and Development, CDOs alone have cost financial institutions some $300 billion and continue to weigh on their stock valuations.

Alesco has its own unique set of circumstances. It carries some $11 billion in debt and reported a GAAP loss of nearly $500 million for last year's third quarter. Yet through various adjustments tied mostly to loan-loss provisions, the company also reports an "adjusted earnings" number that turns an $8.36-per-share GAAP loss into a $0.31-per-share profit. While such adjustments aren't unusual for REITs, investors have to look behind the numbers to get a full picture of a company's prospects.

Short sellers aren't sold on Alesco's viability. With more than a fifth of the outstanding shares sold short, the shorts are placing heavy bets that Alesco will have trouble paying its bills. And since REITs have to pay dividends based on their earnings, the stock's rich dividend could fall dramatically if the company's profitability declines.

Quite a few CAPS investors agree with that sentiment: Fully two-thirds of highly rated All-Stars are bearish on the stock. Yet you can't rule out the REIT entirely. Some of the worst-hit financials faltered before the Federal Reserve started cutting rates. The recent cuts may take some of the pressure off and allow some struggling financials to save themselves. CAPS player SensationalSam, for example, believes the sell-off has been overdone and points to strong management in endorsing the stock.  

Finding value under rocks
So there you have it -- five low-rated laggards that have won big endorsements from some of the best and brightest investors in the CAPS community. Some folks, of course, are not so optimistic about these companies. If you want to add your two cents on these or any other companies, sign up to join Motley Fool CAPS, absolutely 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.