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
It has been a long time coming, but KV Pharmaceutical has begun shipping its first batches of product in almost two years, having finally cleared the hurdle of Food and Drug Administration inspections of its manufacturing facilities. The pharma ran afoul of the regulatory agency when it ignored an order to stop selling cough medicines that contained time-released guaifenesin. The FDA ended up seizing $24 million worth of inventory as a result. The Justice Department also filed a lawsuit against the company to prevent it from selling drugs that failed to meet FDA standards, and earlier this year its generic-drug business pleaded guilty to those charges and was assessed $27.6 million in fines and restitution.

Perhaps seeing an opportunity to kick a rival when it's down, generic-drug maker Perrigo (Nasdaq: PRGO) filed a new drug application this summer for a vaginal yeast infection drug KV holds the patents to.

The host of issues facing KV Pharmaceutical would certainly make it an underdog in most investors' playbooks. Last month, peterod said that while risks still abound, it has put itself back on the path to growth.

Get into KV.A now!!! The bond holders are working with this company and now they are just beginning to bringing production online and get there cash flow going again. Further scrutiny from the FDA may be a risk for the other lines but it with the consultants that they are using to help them through the process are A-1 from what I've read.

All charged up
Which will drive the nascent electric car industry: high-end luxury cars from Tesla (Nasdaq: TSLA) and Fisker, or more economical models like Nissan's (Nasdaq: NSANY) Leaf and GM's Chevy Volt?

Probably both, but Quantum Fuel System Technology is inevitably hoping more for the former as it has an exclusive contract with Fisker to supply solar roof modules on the carmaker's sleek Karma model. With production scheduled to begin in the fourth quarter and a new supply agreement for Karma's drivetrain, highly rated CAPS All-Star member SultanOfSwing says it's a watershed event for Quantum.

$30M contract to supply Fisker Karma w/ car components. $30M is 3X current assets and 15X quarterly revenue. Game changer.

With shares trading below $1 each, however, it has received a delisting notice from the Nasdaq exchange. It's proposing at its annual shareholders meeting scheduled for next week a 1-for-20 reverse stock split to artificially drive the shares higher. While often a sign of a troubled company, Quantum's hitching a ride with Fisker may be just enough to mitigate the risk that would normally attend such an event.

Getting schooled
Biopharmaceutical Vical has been giving investors a rollicking ride as well. In what looks like the death throes of the company following a report that a drug it was developing with sanofi-aventis (NYSE: SNY) to restore blood vessel growth in damaged limbs was reported as being no better than a placebo in late-stage tests, shares plummeted, soared, and fell again all in the space of a week.

While many CAPS members are siding with member tenmiles that the risk-reward ratio is in Vical's favor, DudeManBroChief figures the stock will rise by an appreciable amount between now and the results being released for Allovectin-7 next year.

Look for this stock to spike in mid-2011 before results are revealed for the phase III trial of Allovectin-7 in melanoma.

Need more information before making an investment decision? Put Vical on your My Watchlist page 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.