These 5 Underdogs Are No Dogs

Short-sellers and hedge funds, though sometimes shadowy, have also gained a reputation as the smartest investors in the room. 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 one or more stocks would underperform the market.

Let's look at some of the recent calls these All-Star investors have made. But instead of zeroing in on their short calls, we'll focus on the stocks these top members expect will outperform the market. If they've been scoring points by betting that certain stocks will fail, it may be worth our while to see which ones they think will succeed.

Not every short sale goes as planned, making it a risky position to hold. Stock prices can be irrational for 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
Commercial real estate is widely considered the next domino to fall in the recession. Banks with heavy exposure to the sector will be hit just as hard as those that overweighted themselves on subprime mortgages.

Industry ratings agency Realpoint just issued a report analyzing July's commercial real estate numbers and found that 90-day-plus delinquencies rose 17% from the month before to $11.2 billion, faster than the increase in either foreclosures or REOs (real estate owned, meaning when property is turned over to the bank). It suggests a pending tsunami of defaults.

That rogue wave could crash down on Regions Financial, which has a large exposure to commercial real estate loans. But despite those concerns, some analysts believe Regions Financial will be able to ride out the storm, since it remains sufficiently capitalized.

CAPS members aren't so sure. They point to a Bloomberg news story highlighting a footnote in Regions' financial statements, which indicates that it has inflated loan values on its books. If its balance sheet reflected the market value of its loans, the bank would have negative equity. The loans on Bank of America's (NYSE:BAC) balance sheet are also overdone, comprising 58% of its Tier 1 common equity, while Wells Fargo (NYSE:WFC) also carries some seriously exaggerated values. Highly rated CAPS All-Star Imperial1964 says that if it weren't for the changes in mark-to-market accounting rules, Regions Financial would be insolvent:

Look at the footnote on the 10-Q. Their loan values are, according to the market, worth $22.8B less than is stated on their balance sheet. Shareholder equity is just $18.7B. In other words, by mark-to-market rules they would be insolvent.

Not in the doghouse
Online role-playing-game purveyor Perfect World has been living the life of Dr. Pangloss lately. Shares nearly doubled over the past three months, and more than tripled over the past six. Perfect World is building out a portfolio of popular games in China, where a seemingly insatiable appetite for such fare allows many successful competitors in a space dominated by Shanda Interactive (NASDAQ:SNDA).

At just 12 times forward earnings, the Motley Fool Rule Breakers recommendation trades at a multiple equal to Shanda, yet offers nearly twice the long-term growth potential. However, China has previously implemented usage curbs and set up treatment clinics to fight what it calls gamers' addiction, which could be bad news for companies such as Perfect World. Highly rated CAPS All-Star BoiseKen likes the future possibilities for expansion, but also sounds a sober note about government intervention:

Putting it here to follow the price -- All I can say is: Huge Growth vs. low p/e. Major risk factor is odd-ball regulation from the Chinese Gov't.

There's no need to fear ...
Underdogs shine brightest with their backs against 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.