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 taking a hit. If 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 89,000 professional and novice investors. I'm looking among them 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.

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

Typically, there's a low-rated stock that has also enjoyed a large one-year run-up in its stock price and thereby leaves me leery. Sure, stocks can continue to run, but these picks' high valuations -- and low ratings -- leave me cold. Not so this week, as only Capstead Mortgage has managed to eke out a slight gain over the past year, even though it's up some 34% as I write today.

Not surprising, perhaps. Most of the industries represented here are financial-services and mortgage companies, some of the hardest-hit areas of a softening economy.

A peek over the shoulder
What can you say but "Whew"? At least that's what investors have to be thinking after Lehman Brothers posted a fourth-quarter earnings report that managed to beat analyst estimates and ratcheted back concerns that the housing market was going to further erode its capital base.

The seeds of the current report were sown last year, when the third-quarter report was released. It was full of much the same doom and gloom as the current report, but equity capital markets and asset-management segments were showing surprising strength. That carried over into the just-reported quarter, where, despite a drop in overall revenues and the need to write off $1.8 billion in assets from the mortgage mess, Lehman Brothers saw equities revenue rise 6%, merger advisory fees jump 34%, and investment-management revenue climb 39% from last year.

For the time being, anyway, it looks as though Bear Stearns (NYSE: BSC) will be the only bones JPMorgan Chase or anyone else will be looking to pick clean.

A bet that Lehman's earnings news would be good when everyone was expecting the worst led CAPS investor MaxProfit81 to back it. Good call! You're up more than 53 points versus the S&P 500 at the moment.

Top-rated CAPS All-Star SeaScallop found the potential for a windfall in the Federal Reserve's actions this weekend to be enough to secure Lehman's immediate future:

There's likely to be a lot of chaos in the short term because facts are in short supply and emotions are running high. However, there was a significant discontinuity in the market over the weekend with the [Fed] opening up emergency loans to investment houses. Citibank, UBS (NYSE: UBS), and others had to go overseas and pay 13% and 11% for loans. The [Fed's] action combined with lowering interest rates means some firms will get nearly free money for several months -- a huge windfall.

Whatever the short-term effect is, some CAPS players believe that the long-term ramifications of the having Fed opening the cash spigots means financial companies will be hard-pressed to prosper. Says yes2jbs:

Investors will run for the hills during the current recession. This will drive financials to all-time low levels. Since the recession will be [exacerbated] by the Fed expanding credit and running the printing presses nonstop, financial returns in inflation-adjusted terms will be near zero or negative.

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 CAPS investors. If you want to add your two cents on these or any other firms, sign up to join Motley Fool CAPS, absolutely free.