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's not often you'll find Dolby Labs behind the 8-ball, but the sound system specialist has been beaten down by nearly 30% from its recent highs as concerns about its business prospects grow. The PC is dead, we're told, with the iPad and other tablet computers ascendant. The problem is that Dolby derives a good chunk of its licensing revenues -- which itself account for 84% of total sales -- from the computer industry. DVD players are included as a standard accessory in most computers, and Dolby's sound technology is built into them.

A lot of Dolby's recent success was on the launch of Microsoft's (Nasdaq: MSFT) Windows 7 operating system. Coming as it did as users were looking to upgrade their systems, sales took off, and Dolby was the beneficiary of millions of new computer sales. And although consumer purchases of Windows 7 faltered this quarter for Microsoft (sales were down a disappointing 8%), the enterprise market is growing. The software maker says corporate spending has returned, and businesses are upgrading to the new OS. Business sales jumped 9% last quarter.

As Dolby is expected to report its own earnings this week, investors have been keeping an eye on just how much Apple (Nasdaq: AAPL), Motorola Mobility (NYSE: MMI), and other tablet makers have eaten into the PC market, and how big the tablet segment is likely to grow. Analysts have downgraded Dolby because the sound specialist earns lower royalties on tablet computer licenses.

Highly rated CAPS All-Star TSIF thinks that at its current low price level, Dolby presents a good risk-reward profile:

Dolby still isn't "cheap" by some metrics, and insiders have not been too loyal, but solid margins, growth, and possible share buybacks with the excellent cash flow continue to ensure strong institutional loyalty and Dolby appears ready for a rebound off it's bottom.

Tune in to its results and give a shout out on its prospect on the Dolby Labs CAPS page.

No good deed goes unpunished
A company that earns $10.7 billion in one quarter, a 69% increase over the year-ago period, isn't typically thought of as an "underdog." Yet ExxonMobil, along with other very profitable companies from peer Chevron (NYSE: CVX) to conglomerate General Electric, are coming under attack because they're "too profitable."

The politicians criticizing the companies for their profits can't tell you what an appropriate profit level is, but apparently like pornography, they'll know it when they see it. The problem is that rather than having any special insight into what right-size earnings are, they may well enact policies that actually hurt businesses to make them less profitable. After all we've spent to stimulate the economy, that's just crazy! Moreover, it ignores the policies they and the Federal Reserve already instituted, which have driven commodities to higher price levels.

Even with the political risk of being successful, CAPS member tbonci concludes Exxon is a company you want to own for the long haul:

A dynamic, domestic energy leader like XOM will always give great returns. This is a low risk, buy-and-hold beauty. P.S. Dividend.

Keep an eye on how the politicians try to kill the goose that lays the golden egg by adding ExxonMobil to the Fool's free portfolio tracker.

All aboard!
It might not attract the same attention as Exxon, but integrated natural gas shop Williams Companies has been just as successful, if on a smaller scale. Since going public in 2005, it has steadily increased its dividend, and just announced a whopping 60% hike in its payout. In addition, it plans additional 10% to 15% dividend increases beginning in June 2012. It also just filed to spinoff its exploration and production unit.

rsedgley says the world needs what Williams produces, and the CAPS community apparently agrees, as more than 96% of the 525 members rating the oil and gas company believe it will outperform the broad market averages. Add Williams to your watchlist and develop an opinion for its future on the Williams Companies 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.