Surprising Low-Rated Stocks 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 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 more than 84,000 professional and novice investors. I go looking for those 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.

Here are a few stocks that have gotten the nod from the cream of our CAPS investors:

There's typically a low-rated stock that has also enjoyed a large one-year run-up in its stock price, leaving me leery. Sure, stocks can continue to run, but these picks' high valuations -- and low ratings -- leave me cold. But there really isn't one of those this week, as performance leader Bidz.com has fallen from grace still further since last month.

Peeking over the shoulder
One could get dizzy after thinking about how fast electrons must spin to acquire, store, and transmit information, but NVE has been keeping its feet firmly planted on the ground as it continues to explore ways to get the nanotechnology of spintronics into more mainstream applications.

NVE currently relies on government contracts to develop the technology, but it sees the possibility of spintronics being used by industrial and commercial clients in a variety of applications. The company notes that cell phones, for example, are reliant on DRAM for the operating software; SRAM for digital signal processing; and flash memory for phone books, ring tones, and permanent storage. These consume power and space. NVE's MRAM, however, could replace all three and create a smaller, more power-efficient device in the process.

Among the problems NVE faces -- aside from its reliance on government R&D contracts -- is the prospect of larger or better-financed competitors like Freescale Semiconductor and Cypress Semiconductor (NYSE: CY) in the MRAM field, as well as Fairchild Semiconductor (NYSE: FCS) and others in related segments.

It's the prospect of intense competition and the possibility of being unable to commercialize its top technology that keeps CAPS investors like new player bigmommo from adding NVE to their portfolios.

... Yes, it has very solid looking financials, and healthy growth rates, and dramatic margin improvements. However, on the most recent conference call (1/23/2008), management avoided questions about new customers, was vague on the actual potential to turn MRAM into a real revenue stream, and they have heavily cut R&D spending. Accounts Receivable are growing faster than revenue, which makes me wonder how real the recent gains are. Inventory is also growing faster than revenue, which could signal anticipated growth in sales, but I'm concerned that the growth is primarily finished product while raw material is down. On all fronts they face serious competition ... I will wait and see how the next 10K looks before considering this again as a possible buy.

Yet boojbot thinks this next-generation technology will carry it forward nonetheless, "NVEC's technology hidden under MRAM will be the source of [its] success. The management needs to be savvy with the fledging company."

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, although there are always some who are not so sure. If you want to add your two cents on these or any other firms, sign up to join Motley Fool CAPS, absolutely free.