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 that Himax Semiconductor investors didn't have warning its dividend was unsustainable. Its payout ratio showed it was paying out more to shareholders than it was taking in, so when it subsequently more than halved its dividend to just $0.12 a share, investors shouldn't have been so shocked. After all, it's the third time in three years Himax has done this.

More surprising perhaps is that despite trading some 30% below its 52-week high, Himax shares have bounced back to where they were when the latest round of dividend destruction began.

Himax says customers are demanding more CMOS image sensors from them, and that could be providing the hope investors need. The chip maker says revenues jumped well above the previous quarter's level, and while margins have been hurt, they're slowly swapping out older product for new and should see the trend reversed. With mobile computing gaining in popularity, Himax is expecting better things ahead. But analysts are still concerned about the sector, downgrading ON Semiconductor (Nasdaq: ONNN), Microchip Technology, and others in the space on concerns over spending trends in the space.

CAPS members remain hopeful, too, with 97% of more than 900 rating the chip maker to outperform the broad market averages. Add your opinion to the Himax Technologies CAPS page on whether the dividend cut was a necessary evil.

An eroding foundation
Flooring specialist Lumber Liquidators didn't have a dividend to cut, or things might not have been so bad when it said it was going to have to whittle down its sales estimates for the coming year. Shares of the hardwood flooring leader lost nearly a quarter of their value on the news of revised expectations because consumers have rethought making big-ticket purchases.

While the number of homeowners receiving loan modifications is down 10% in the first quarter from last year, it's up 17% from the fourth quarter. Housing is still being put through a wood chipper, right alongside employment. Those are not conditions ripe for businesses relying upon strong consumer confidence, which is why investors might also see trouble cropping up at Home Depot and Lowe's (NYSE: LOW).

Yet CAPS member kenjotto thinks the drop in value was excessive, that the retrenchment in the economy will be short-lived:

Well, [Lumber Liquidators] is a discount store for hardwood flooring. Once we get through this scary softpatch, and people go back to investing in their homes (either cause they are stuck there or think they can sell) they'll be knocking on [Lumber Liquidator]'s door.

While we might disagree on the length of the downturn, I agree with kenjotto on Lumber Liquidators' quality, price, and long-term viability. I just don't see a catalyst right now for growth. How about you? Tell us on the Lumber Liquidators CAPS page whether it will walk away from this in fine fashion.

Did we disconnect?
We hear a lot about mobile communications, but the leader at the enterprise level, and equally important, in government, particularly in public safety circles, is Motorola Solutions. It's the company that was left after the divestiture of Motorola Mobility (NYSE: MMI). With earnings scheduled to be reported later this month, Motorola Solutions will be looking to build on its strong first quarter when it inked a deal with Verizon (NYSE: VZ) to install a public safety broadband network based on the carrier's LTE standard.

CAPS member inastrangeland says with Motorola Mobility out of the picture, Motorola Solutions will prove a stand-alone winner:

Without MMI, this business will continue to grow revenues and profitability over the long run. They are the market leader in worldwide public safety communications systems, including 4G LTE. The enterprise solutions business is expanding rapidly (14% growth over Q1 2010) and retailiers have woken up to the need for high tech devices to manage their businesses.

Add Motorola Solutions to your watchlist to see whether two companies can really be better than one all by itself.

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.