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 travel in packs
Pharmaceutical giant Merck (NYSE: MRK) is teaming up with Roche to market its hepatitis C drug in an effort to minimize the threat arising from a competing drug offered by the team of Vertex Pharmaceuticals (Nasdaq: VRTX) and Johnson & Johnson (NYSE: JNJ).

But the partnerships don't end there, either. J&J plans to hook up with Gilead Sciences to market a new HIV cocktail treatment combining J&J's Edurant with Gilead's Truvada. J&J just got approved for Edurant, so this union has many excited about its sales potential. After all, Truvada is a component of Gilead's Atripla, currently the top-selling HIV therapy.

Yet Gilead itself is moving ahead with its own new alternative, called Quad, which is also considered more effective than Atripla. While Johnson & Johnson might look well-positioned to capitalize on these partnerships, Gilead Sciences seems to have the most to gain here, thanks to its pole position in the AIDS treatment market.

With 97% of the more than 2,200 CAPS members rating Gilead to outperform the S&P 500, it's clear they believe it holds the winning combination. Head over to the Gilead Sciences CAPS page and let us know whether you think the drugmaker's on the right team.

An eroding foundation
Housing starts sequentially dropped 10.6% in April, to a seasonally adjusted annual rate of 523,000 units. This 23.9% drop year over year marks the biggest drop in construction since 2009. Even worse for homebuilders, building permits also fell, suggesting there's still no demand for new houses.

As bad as the news is for homebuilders, it's just as bleak for the mortgage insurers. Genworth Financial (NYSE: GNW) and PMI Group both recently reported financial results that underscored just how dismal the situation is. Genworth's mortgage-insurance segment losses more than doubled from the year-ago period. PMI's losses, although narrower, were still pretty large, at almost $127 million. As a result, PMI may end up falling out of compliance with regulatory requirements this quarter.

It takes a special optimistic outlook to see the silver lining in PMI's situation, but almost two-thirds of the CAPS members rating the mortgage insurer are doing just that. Steve2737 acknowledges the danger, but believes there's more upside potential than downside risk.

$2.10 for a bad stock that can really move way higher in couple of years is a bargain. Maybe will go down another 10-20% but 500% upside is possible in 5 years. Go long!

You can ensure you stay on top of PMI developments by adding the stock to the Fool's free portfolio tracker.

Following the wrong playbook?
Things haven't exactly been going Research In Motion's way lately. The stock was already trading down from recent highs when it issued a profit warning late last month that sent shares careening lower. The company's endured several harsh critiques of its operations lately. Having to recall its iPad wannabe Playbook because of an operating-system flaw did nothing to alleviate some analysts' notion that RIM is the next Palm: A onetime leader that basically lost everything.

Yet Apple was once a troubled company, too. Although it's hard to compare RIM to the iconic consumer-device maker, the Playbook does have its backers, and the BlackBerry retains a certain cachet. Revitalizing its smartphones and building upon its current tablet could indeed turn things around for RIM. Priced at just six times next year's earnings, when even soured analysts estimate more than 13% growth over the next five years, this stock looks just plain cheap.

CAPS member jaydotdigital thinks the smartphone segment will lead RIM's resurrection:

Smartphone purchases continue to grow, and RIM has a simple product that works well. BBM is their flagship feature, and will hopefully soon appear on other platforms. I know i'd pay 5$a year for a BBM app on my iphone. Any positive news will bring this this back into the 50's.

Add the smartphone maker to your watchlist and dial up additional views on the Research In Motion 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.