Short-sellers and hedge funds, though sometimes shadowy, are often considered the smartest guys on Wall Street. They've done their homework and will bet their capital against the crowd. It's not the most popular way to go, but the rewards can be quite lucrative.

On Motley Fool CAPS, we've got our own brand of leading analysts who found the chinks in a company's armor and correctly called its fall. "Underdogs" are investors who earned 100 or more CAPS points by correctly predicting that one or more stocks would underperform the market.

Let's look at some of the recent calls these All-Star investors have made. Just as hedge fund operators don't always go short, we'll look at recent picks from Underdogs, no matter which way they've called them.


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Intrepid Potash (NYSE:IPI)





Visa (NYSE:V)





Ryland (NYSE:RYL)





Ultrashort Russell 2000 Proshares (NYSE:TWM)





Vulcan Materials (NYSE:VMC)



Not every short sale goes as planned, making shorting a very risky pursuit. Stock prices can be irrational longer than you have money to stay in the game. So don't use this as a list of stocks to sell or buy -- just a launching pad for further research.

Underdogs still wag their tails
The year to date hasn't been very kind to small-cap stocks, and we're only in February. The Russell 2000 index had its worst January ever. So far this year, it's down more than 15%, as measured by the iShares Russell 2000 ETF (NYSE:IWM). That plunge followed a dismal 2008, in which it lost 34% of its value! Investors are undoubtedly wondering what the rest of 2009 holds in store.

In their book Investing in Small-Cap Stocks, authors Christopher Graja and Elizabeth Ungar discuss the small-cap cycle, and how small-cap stocks continually go through periods of dominance and underperformance. To measure our current position in the cycle, Graja and Ungar compare the price-to-earnings ratio of the S&P 500 to that of the T. Rowe Price New Horizons Fund, a small-cap growth fund whose top holding is Henry Schein (NYSE:HSIC).

If the two P/E ratios were about equal, small caps would be oversold, and we might expect a period of overperformance to follow. If the New Horizons Fund posted about twice the index's P/E, it might signal an overheated small-cap market, and we could anticipate a fall. Today, New Horizons' forward P/E is 13.4, while that of the S&P is 13.1. Certainly, the small-cap fund's valuation exceeds that of the market, but not greatly enough to suggest the small caps are overvalued, either. In short, Fools might want to use caution when betting against a small-cap resurgence.

The Ultrashort Russell 2000 ETF intends to do just that, however. It seeks daily investment results corresponding to twice the inverse of the daily performance of its index. As such, we certainly wouldn't want to make this a long-term holding in our portfolios. These "ultrashort" ETFs' volatility, and the fees associated with ETF trading, don't make them the best investment vehicles for all investors.

There's no need to fear...
Underdogs shine brightest when their backs are to the wall. Still, it takes more than a few All-Star picks and a quick paragraph to make buy or sell decisions. Start your own research on these stocks on Motley Fool CAPS, where your opinion can still save the day. While there, you can read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made, all from a stock's CAPS page.

Vulcan Materials is a Motley Fool Inside Value pick. Try any of our Foolish newsletter services free for 30 days.

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's disclosure policy's wag is worse than its woof.