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'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. 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
You know it's never going to be good news when a company drops an announcement after the markets closed on a major holiday weekend. So when China Sky One Medical decided to update investors on the state of its business Friday afternoon before Memorial Day, you knew they had something big they wanted to hide. That would have been that several major distributors had cut their ties to China Sky One causing it to scale back its revenue projections for the year.

As if that wasn't bad enough, it also announced its CFO had resigned two days prior "due to health considerations." No doubt they were brought on by the SEC inquiry going on into the company's operations.

So why think this one is an underdog? The realm of traditional Chinese medicine is growing, with American Oriental Bioengineering (NYSE: AOB) and Tongjitang Chinese Medicines (NYSE: TCM) also trying to create brands from thousand-year old traditions. As CAPS member actuary99 suggests, the pressures weighing down on China Sky One may have just as much to do with skepticism about TCM as about fraudulent accounting practices: "Lots of fraud suspicions around this one, but to me it all seems like "legitimate" fraud (e.g., [China Sky] pretending alternative medicine isn't a waste of money)."

A dose of reality
Investors might be heartened that Medtronic won approval of its newest stent used to prop open arteries, but there's a lot of competition, including Abbott Laboratories (NYSE: ABT) and Boston Scientific (NYSE: BSX). The new Integrity stent, however, which already received approval for use in Europe earlier this year, should help the medical device maker continue growing its cardiovascular portfolio.

Medtronic generated 19% of its revenues, in the first quarter, up 4% from the year ago period, with the primary drivers being its Resolute drug-eluting stent and sales from the Integrity bare-metal stent. Now with U.S. approval under its belt, expect to see revenues grow further.

Highly rated CAPS All-Star member skat5 believes the bad quarter it had that dropped the stock price gives investors an opportunity to get in a leading medical device maker at a good price.

I see the recent large drop in response to a bad quarter prediction as a buying opportunity for a company that is paying a comparitively high dividend and has a history of paying/increasing dividends for more than 25 years. I find it unlikely even the anti-business socialized medicine crowd will wreck this, although they are perfectly capable of slicing their nose to spite their face. Its either get out of investing in health care altogether, or focus on the best companies when there are buying opportunities.

Getting schooled
Oil giant Total says in the wake of the Gulf of Mexico oil spill, drillers are going to experience delays in getting permits and higher costs, but with the region rich in potential and tax incentives favorable for continued exploration, you're not going to see many of the major drillers abandoning the area.

That makes a good argument for choosing an oil driller that can navigate the more difficult regulatory waters and absorb the added costs with less impact to its operations. A smaller drilling outfit is going to have a harder time in the swells the Deepwater Horizon disaster created. Total isn't one of those small shops and Retracement says it's solidly profitable.

Valuations of top-quality, dividend-paying companies has been excellent as of late. Low debt, record cash, increasing M&A activity. Total is one of the cheapest oil companies around. Present valuation could hardly be better. Solidly profitable, P/E below 10 and more then 6% dividend. Sometimes long-term investing is just plain easy.

Need more information before making an investment decision? Put Total on you're My Watchlist and have all the Foolish news and analysis of the stock aggregated for you in one place.

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.