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.

Source: Motley Fool CAPS

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.

A popular stock?
After a disappointing 2011 that saw Puerto Rican banking giant Popular lose more than half its value, investors have reason to be hopeful the coming year holds the promise of better returns. It's posted three consecutive quarters of profits as the tiny island's economy has stabilized, although loan loss reserves did pop in the most recent period.

Caribbean rival Doral Financial (NYSE: DRL) wasn't so fortunate, seeing its losses grow by more than half last quarter. But with 25% of Popular's assets located on the mainland as well, it's not as dependent upon Puerto Rico's rebound as is Doral, whose operations are almost exclusive to the island.

Puerto Rico's government is also Popular's largest customer, which has almost $1 billion of credit facilities granted to or guaranteed by it, its municipalities, or its public companies. So there should be a level of stability associated with that. As the Fool's Sean Williams notes, Popular sports tier 1 ratios that exceed those of Bank of America and even Wells Fargo.

Still its fortunes are largely tied to those of the idyllic destination and the market has opted to discount it because of that. CAPS member neilepi is looking for the recovery of the financial sector to extend down to the Caribbean and carry Popular higher too.

Recovery stock in recovery sector. Insider buying. Tax-loss sellers will repurchase.

Add Popular to your Watchlist and see if, like the only place in the U.S. that is home to a rain forest, the bank will become an island jewel again.

So much for happy holidays
Toymaker JAKKS Pacific found itself behind the eight ball after lowering full-year guidance, saying no one wanted to play ball this holiday season, forcing it to markdown product.

Investors in rival Hasbro (Nasdaq: HAS) can say they were forewarned, since it just pre-announced its own earnings and they came up short of expectations. The market's taking it in stride, however (shares are trading up this morning), no doubt because JAKKS paved the way last month and it took its rival down with it. Mattel has fared better, but has pulled back from its highs.

JAKKS is in a weaker position than either of its larger rivals, though, since it doesn't have the same level of movie tie-ins they do. While that does create a level of risk beyond just being a toymaker, it also opens up additional streams of revenue and allows them to save on marketing expenses since the movie studios carry all the advertising weight. No need for Hasbro to pay on a big ad spend for a Transformers figure when the studio will be promoting the heck out of the film anyway, driving consumers to stores looking for the toys. JAKKS doesn't have that leverage, so it is a riskier proposition.

Come play on the JAKKS Pacific CAPS page where 95% of the members rating the toymaker still believe it will beat the Street going forward, then add the stock to your Watchlist see how it plays out.

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.