These Underdogs Are No Dogs

Short-sellers and hedge funds may be shadowy, but sometimes they are the smartest ones 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 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
Penny for your thoughts? Well, we know what investors thought of the recent earnings report from telecom equipment maker JDS Uniphase, which missed analyst expectations by a penny. Despite the company turning profitable in the fourth quarter, shares dropped after disappointment over the missed opportunity set in. Fiber-optic networking equipment competition is tight among it, Oclaro, and Finisar, but with 4G deployments heating up, JDS Uniphase expects to see its way to the lead.

Investors in StemCells were disappointed as well that a judge temporarily blocked President Obama's increasing the stem cell lines created with private money that federally funded scientists could research, ruling that it might be against federal guidelines. But StemCells and other innovators like Cytori Therapeutics (Nasdaq: CYTX) that don't engage in embryonic research -- which was the focus of the judge's order -- should recover sooner than Geron (Nasdaq: GERN), which does.

A dose of reality
Jack Sprat's wife might not be able to eat no lean, but she won't be able to take Qnexa to help her lose the weight. VIVUS -- along with rival obesity drugmakers Arena Pharmaceuticals (Nasdaq: ARNA) and Orexigen Pharmaceuticals -- went splat after an advisory committee recommended that the Food and Drug Administration not approve VIVUS' fat-fighting therapy. Suddenly, the profits in obesity drugs are looking very thin indeed.

The Fool's Jordan DiPietro isn't hopeful here, and while he thinks Arena's lorcaserin also falls a bit short in the reward-to-risk ratio, it does offer more safety data. And Japanese pharmaceutical Eisai ponied up some money for lorcaserin's development, which may suggest a promising future. It also might help explain why Arena is flying higher again.

Yet Arena investors might not be feeling fit just yet. The advisory committee will make a decision on lorcaserin in two weeks, but the day before that it will look at Abbott Labs' (NYSE: ABT) Meridia, which had to be pulled from the market in Europe because of cardiovascular side effects. To some, that's too coincidental to how the panel looked at the safety profile of GlaxoSmithKline's Avandia the day before it shot down Qnexa. It's expected that the FDA will give the word on both lorcaserin and Qnexa in October.

Last month, CAPS All-Star JPG101 figured the risks associated with VIVUS' obesity drug outweighed the rewards, but JuanPeter is more optimistic.

it has reasonable chances to have Qnexa approved in october PDFUA though there's even more reasonable chances to have it rejected if they don't provide additional data. In addition, results for avanafil are expected by the end of the year.

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.