These 5 Underdogs Are No Dogs

Short-sellers and hedge funds may be shadowy, but sometimes they're the smartest guys in the room. They've done their homework, and they're willing to bet their capital against the crowd -- an investing strategy that can be as lucrative as it is contrarian.

On Motley Fool CAPS, we've also got leading analysts who find the chinks in a company's armor and correctly call its fall. Our "Underdogs" have 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. Instead of studying more of their pessimistic picks, we'll focus on the stocks these top members expect will outperform the market. If these CAPS investors have scored big by correctly predicting which stocks will fail, it may be worth our while to see which others they think will succeed.

Not every short sale goes as planned, making shorting a risky proposition. 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 the launching pad for further research.

Underdogs still wag their tails
Aluminum producer Alcoa typically leads off the earnings season, and last quarter it underwhelmed the market by posting just a penny-a-share profit instead of the $0.05 analysts were expecting. Its stock now trades 14% lower than where it started the year. With the earnings rush concluded, however, we'll now see more macroeconomic forces driving commodity stocks such as Alcoa for the immediate future.

Automakers, who buy plenty of aluminum for their four-wheeled offerings, could suggest the outlines of Alcoa's future. Toyota (NYSE: TM) isn't helping matters much with its runaway cars, but Ford Motor (NYSE: F) jumpstarted its engine. That leads CAPS All-Star member Teacherman1 to believe that Alcoa will foil the naysayers:

Bought this back in March, and sold at [a] profit. Thought this was a good entry point to get back in. Has not been 10% lower in the past 6 or 7 months. See an upside from here of at least 100%. As the economy picks up, especially the auto industry, this will climb steadily. In worst case scenario, don't see a realistic down side of more than 20%, so I like the ratio.

A cure for what ails you
The natural conflicts between traditional Chinese medicine (TCM) and Western practices won't hurt Tianyin Pharmaceutical, which incorporates both TCM and modern alternatives in its medicine cabinet. That's a different approach than either American Oriental Bioengineering (NYSE: AOB) or Tongjitang Chinese Medicines is taking. CAPS member ablengata finds the blended approach better, however, since it provides it a broader customer base to target:

This one is flying under the radar at the moment. Chinese health care is currently in transition from a traditional to a modern approach. [Tianyin] has many western medicine in in their catalog of products, but also supports many culturally important traditional Chinese health care treatments. This gives them an increased customer base compared to other competitors. If they plays their cards right, [Tianyin] is poised for explosive growth over the next 2 years.

Hanging up on growth
The conflict between an administrative law judge and a proposed deal for Verizon's (NYSE: VZ) rural assets would likely hurt Frontier Communications, which is trying to acquire the business to make up for declining legacy landline operations. The hearing officer opposes the sale, because she believes service quality will suffer -- and her recommendation holds sway with the state regulators. 

CAPS member PJR02 is more worried about other issues confronting Frontier if the deal is ultimately approved:

Until Frontier can prove it can operate successfully with the much larger company expected after the merger, Stock price will likely plummet when the merger more then doubles the number of shares and brings into question whether the higher cash flow they expect will be enough to pay out dividends. And lots of infrastructure updates will be required in rural spinco areas that will deprieve Frontier of putting that money into areas they currently have.

There's no need to fear ...
Underdogs often 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.