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
Getting hit hard by housing's collapse when the recession drove into Motor City and spread throughout Michigan, Citizens Republic Bancorp appears to find itself in a better position today. Although it took TARP bailout money, it wasn't required to do a "stress test" and it wasn't required to raise any additional capital. Its second-quarter earnings results also showed narrower losses than last year, but that was due primarily to significant reductions in provisions for loan losses.

Many banks have been juggling their loan loss reserves in an effort to improve their earnings picture, like Wells Fargo (NYSE: WFC), which recently released $500 million from its reserves. Yet the more a bank releases into the income statement the better its health appears, regardless of whether the move was warranted, and there's a fear that banks are simply engaging in "extend and pretend" practices. When those nonperforming loans ultimately fail, they won't have the money available they need because the reserves are not there.

Citizens Republic reduced its reserves by 30%, but its nonperforming commercial and industrial loans only declined by 4% from last quarter and its nonperforming residential mortgages actually exploded 76% higher. Admittedly, residential mortgages comprise just 6.5% of its total nonperforming assets, but it hardly seems to be an environment conducive for such reductions in loss reserves.

Despite those risks, CAPS members are generally behind the bank with 76% rating it to outperform the market. However, only you can decide whether Citizens Republic belongs in your portfolio, so be sure to add it into the Fool's free portfolio tracker, My Watchlist.

All charged up
Now that the moratorium on deepwater drilling in the Gulf has been lifted, it's easy to think Helix Energy Solutions can get back to the business of supporting offshore oil and gas drillers. Unfortunately, it's not so easy. Just yesterday, Halliburton (NYSE: HAL) said its operations took a big hit from the moratorium and it expects fourth-quarter results to decline even more because of it. Swift Energy (NYSE: SFY) calls the Obama administration's new drilling regulations a "de facto moratorium."

As harmful as the moratorium was and as much uncertainty as the government's actions have caused, earlier this summer highly rated CAPS All-Star TMFDeej laid out a case of why that could work to Helix's benefit.

Another potential catalyst beyond a slowing in the writedown of non-cash earnings is the company is has just or is about to begin producing oil and gas from a new well that it actually owns. The company's new Phoenix field is about to begin producing hundreds of thousands of dollars worth of oil and gas per day. Is there a lot of uncertainty surrounding a company that supports the drilling for oil offshore today? Absolutely. That's actually a good thing.

Getting schooled
It seems like such a small thing, yet the move is really the beginning for full-fledged streaming access from Netflix. The movie rental king is doing away with the requirement that you need to load a disk into your Nintendo Wii or Sony (NYSE: SNE) PS3 before you're able to view its Watch Instantly feature on your TV. Coinciding with its unveiling of a streaming-only subscription in Canada, Netflix is quietly preparing for the day when DVDs are dead.

In spite of that, CAPS member TheGraham thinks investors may be making too big of a production out of Netflix's streaming capabilities.

Don't get me wrong, I like Netflix. I think they have a great business model and have been executing to perfection. But having moved into online streaming, they're entering into the domain of some very big players who are not only taking notice, but see the merits of the business model. It won't be long until the major cable and sat providers offer similar service and turn their businesses into one stop shops for standard programming and on demand/streaming services.

Let us know on the Netflix CAPS page if streaming video is the movie rental's equivalent of Hollywood's Walk of Fame.

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.