These 5 Underdogs Are No Dogs

Short-sellers and hedge funds, though sometimes shadowy, are sometimes seen as the smartest guys in the room. They've done their homework and they'll 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 have our own members who found the chinks in a company's armor. "Underdogs" are investors who earned 100 or more CAPS points 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. Yet, just as hedge-fund operators don't always go short, these folks don't always bet against stocks, so we're going to look at recent Underdog picks no matter which way they've called them.

Not every short sale goes as planned, so shorts can be risky positions to hold. 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, but rather as the launching pad for further research.

Underdogs still wag their tails
In this recession, money-hungry state governments have been scrounging a bit deeper among the lint, string, and other detritus of our pockets by trying to force Internet retailers like Overstock.com and Amazon.com (NASDAQ:AMZN) to do their dirty work.

E-tailers have been able to avoid collecting sales taxes if they use sales affiliates within a state because courts have ruled that unless a business has a physical presence there, it doesn't have to collect taxes for that state. Until recently, "physical presence" meant something like an actual office or a warehouse, but legislatures in North Carolina, California, and Hawaii recently passed bills that say the presence of those affiliates is good enough to require them to collect taxes. In response, Amazon and others have chosen to end affiliate programs in some states, thus putting a bunch of small entrepreneurs out of business.

Both Overstock and Amazon ended their Hawaiian programs, as did online diamond retailer Blue Nile (NASDAQ:NILE), which apparently prompted some politicians to reconsider what they were doing. Hawaii's governor vetoed the bill. California Gov. Arnold Schwarzenegger also ended a similar plan in his state with a veto.

Losing affiliates and, therefore, one more avenue to sell its wares was the last thing Overstock needed, because it has had virtually no sales growth over the past three years. CAPS All-Star stan8331 doesn't understand how the company will rebound without major changes at the top.

I've tried to like overstock.com, but after reading through the 1001st ad for over-priced, fluffed-up merchandise, I've given up. Compared to amazon.com and buy.com, Overstock is just a bloated loser. It's hard for me to see how they can turn things around, short of a completely new management team and a new business model.

Yet Overstock has managed to outpace the other 25 stocks in CAPS' Internet and Catalog Retail sector. Its shares have risen more than 15% over the past month while the sector has gone up just 2.6%, only slightly more than the S&P 500 over that same time.

There's no need to fear ...
When underdogs have their backs against the wall, they shine their brightest, but 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. 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.