These Underdogs Are No Dogs

Short-sellers and hedge funds may be shadowy, but sometimes they are 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 also have investors 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. However, we're going to 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
Jewelry store operator Zale (NYSE: ZLC) hasn't had any accounting controversies like Chinese counterpart Fuqi International. But over the past six months, its stock is off by half as the recession ripped into credit sales, forcing it to close hundreds of stores. That's only part of it, though, because Signet shares are trading 12% higher, Tiffany (NYSE: TIF) is flat, and Blue Nile (Nasdaq: NILE) is down 20%. The jewelry trade is essentially all over the map.

Whatever the past, jewelers are more optimistic about the future. Tiffany says its sales in 2010 should grow by 20% or more in Asia, by high double digits in the Americas, and by single digits in Europe. And everyone apparently did go to Jared, because Signet says sales at the chain jumped 19%, with same-store sales up almost 16%.

Even Fuqi, which may have just been putting on a brave face back in March when it revealed its accounting shenanigans, had forecast that demand in its retail and wholesale businesses remained solid for the year. The CAPS community is not buying into the cockroach theory: That where there's one problem there's likely to be lots more. All-Star jimbo1989 believes management has too much at stake.

Although it smells like fraud may be involved due to the lack of attempted corrections (or firing whoever was responsible), it is hard to believe that a company with insider ownership as substantial as this one would allow that to happen. The CEO alone has over $10 Million at stake here so they have every incentive to see what happens.

A dose of reality
The good news keeps coming for Keryx Biopharmaceuticals. It reported that even for pediatric patients with solid tumors that had resisted standard treatments, there were encouraging outcomes with its perifisone treatment for colorectal cancer.

CAPS member geokrat is encouraged by all the positive developments from Keryx and compares it with Dendreon.

Kerx has multiple cancer fastrack drugs in the mill. Pushing Phase III. See it exploding like DNDN did. Only better. Great chart, The [shaky] market is holding it back. News coming out has all been good. My favorite stock.

A golden opportunity
All the talk of a collapse of the commercial real estate market isn't as encouraging. While RAIT Financial was hoping earlier this year that we had come to the beginning of the end of the downturn in commercial real estate, its optimistic outlook on apartments, for example, seems to be premature. RAIT Financial's securities division had suggested the situation would stabilize this year, but apartment building mortgages are defaulting at record levels, with vacancies hitting their highest levels since records began in 1980.

RAIT Financial is heavily invested in multifamily buildings, but if you looked at its stock, you'd never sense the danger. Shares are up 62% this year, but that's nothing compared with others, like iStar Financial (NYSE: SFI), whose shares have more than doubled.

CAPS member x1x2x3x4444 isn't buying all the feel-good attitude and suggests that RAIT Financial's financials are in disarray while insiders continue to compensate themselves extremely well. Yet 90% of CAPS members rating the real estate investment trust pick it to outperform the broad market averages; share your opinion on the RAIT Financial CAPS page.

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.