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 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
On the surface, Coca-Cola wouldn't seem to be a better buy than steel-cage death-match rival PepsiCo (NYSE: PEP). Although rising commodities costs will impact both brands, Pepsi generated more than 40% of its sales outside of North America in 2010 and saw them rise 28% year over year. Coke, on the other hand, generates two-thirds of its revenues internationally, but they grew only 5% last year. On the domestic front, both saw mid- to upper-30% increases in sales.

Yet Coke is able to churn more of those sales into profits. Where Pepsi nets $0.10 out of every dollar in profits, Coke bubbles up $0.35, giving it a multiple that's discounted by the market by a third of its rival's. Having purchased its largest bottler last year, Coca-Cola is now master and commander of 90% of its North American distribution and its Diet Coke brand surpassed Pepsi as the second-best-selling soda in the U.S. -- second only to regular Coke -- as Pepsi volumes declined sharply.

While Warren Buffett's ownership of Coke is enough for some investors, like CAPS member nshamapant (along with a valuable brand name and a dividend that yields almost 3%), others see the diversity of its products as key to its growth. CAPS member socalwatcher just wishes it were more aggressive internationally: "Coke was smart to get into the vitamin water business. I think they will continue to outperform that market, although they really should be more agressive in emerging markets."

Head over to the Coca-Cola CAPS page and drink in the diverse opinions on the world's most valuable brand.

And eroding foundation
Markel is another investor favorite because of a tangential relationship to Buffett, with a management team that emulates Buffett's investing style and operations that resemble Berkshire Hathaway. You can also add Leucadia National (NYSE: LUK) to the mix as a company that takes the best the Oracle of Omaha has to offer and downsizes it into an affordable investing option.

The natural disasters that have swamped the country so far this year -- tornados through the heartland and floods along the Mississippi -- have depressed many property and casualty insurers. Industry estimates peg losses to the severe storms at around $8 billion, very close to the $9 billion the industry experienced for all of last year, and we're only just getting into hurricane season.

But lumping all insurers together could cause investors to miss opportunities. For instance, at its annual meeting, Markel said it doesn't expect the Mississippi floods to impact it very much.

Highly rated CAPS All-Star nrlbuild says Markel achieved its leading position with great performance that stretches back decades:

The price seems to be good at only 1.2 times book value...the big question is can they continue to grow? They appear to have a blend of growth performance (thus no dividend) matched with a more "value" risk profile. Hoping for some safety here with a reasonable probability of growth leading to out performance.

Ensure your opinion is recorded on the Markel CAPS page and keep tabs on it by adding it to the Fool's free portfolio tracker.

Walking away
Chinese IPOs have generated investor enthusiasm simply by branding a company as "the next whatever." Renren (Nasdaq: RENN) was the Chinese version of Facebook, E-commerce China Dangdang (Nasdaq: DANG) was the Eastern Amazon.com, and Youku.com was the Orient's version of YouTube. But you need more than just a catchphrase to make a business, and investors have reconsidered their initial fervor. Dangdang is down 63%, Renren is off 61%, and Youku has been cut in half. Of course, U.S. social media IPO LinkedIn is down 40% from its offering price, despite being seen as a grown-ups' version of Facebook.

Dangdang and Youku can point to the expiration of the lock-up period as a partial explanation of their stock's decline, with insiders willing to cash in quickly on whatever riches might be coming their way, but Youku has already had a secondary offering. Its outside investors might be feeling particularly diluted already.

CAPS All-Star GundersonGroup says the well of money (if not goodwill) has already run dry for Youku:

Chinese Internet bubble bursting. YOKU is burning through tremendous amounts of cash every quarter, will be unable to go back to markets with recent stock market action to raise funds and not likely to get lending from Chinese banks. TBV of 2.70 per share

Add Youku to your watchlist to determine whether this will become a big video hit.

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.