Surprising Low-Rated Stocks the Leaders Love

Piggybacking on the picks of great investors and money managers can often lead to big rewards -- especially when the stocks in question are beaten down.

If you'd bought Ingersoll-Rand when Warren Buffett announced his small stake in this industrial company last February, you'd be enjoying a roughly 20% gain so far. You'd be up another 40% if you'd followed David Dreman of Dreman Value Management into aerospace and industrial products manufacturer Barnes Group at the end of March.

Over on Motley Fool CAPS, more than 65,000 professional and novice investors alike have rated more than 5,000 stocks, indicating whether they think those companies will beat the market or lose to it. The best investors, those who consistently outperform their peers, are considered All-Stars. They might not match Buffett, Lynch, or Dreman yet, but their records are remarkable all the same.

The best of the best
All-Stars each boast a CAPS rating of 80% or more. That's plenty good, but I wanted to see which companies the very best All-Stars were choosing. I searched CAPS for players with a rating of 90% or better. Then I searched through this set of players to see who'd chosen one- and two-star stocks to outperform the market.

Why low-rated stocks? Just like the players, stocks receive ratings, too -- from one to five stars. The majority of CAPS investors may think these stocks are dogs, but our top All-Stars believe they'll have their day. It's a typical contrarian investor concept -- what value investing legend Benjamin Graham called "picking up cigar butts."

These five one-star stocks have gotten the nod from the cream of our CAPS All-Stars:

Typically, there's a low-rated stock that's also enjoyed a large one-year run-up in its stock price that leaves me leery of considering it as a possible investment. Not that stocks can't continue to run, but their high valuations -- with their low ratings -- leaves me a little cold.

This week it's SulphCo, a company that uses ultrasound to turn sulfur-sour crude oil into a useable light, sweet crude. Not exactly as fanciful as spinning straw into gold, since Motley Fool Rule Breakers recommendation Headwaters (NYSE:HW) uses a different technology to achieve the same result, but it doesn't seem as proven, and the company and its owners have a speculative past.

More than 43% of the All-Stars rating this stock think it will underperform on the basis of their being "a lack of substance," as Joshuancsu notes in his bear pitch.

I think that this stock really showcases how disconnected the stock market can be at times. If you look at the type of people that are forecasting an Underperform, they are typically higher ranked players that have done their homework. They notice a lack of revenue and also a lack of substance behind this company ... and they are willing to take a -160 score on this one b/c they know it can't last.

The lower ranked players who are playing this for exactly what it is (a game), are just watching the number climb and climb. At some point, reality will hit and those players better move fast to dump the stock.

While I am certainly suffering with a -160 score, I am awaiting the day when reality hits and the stock price readjusts. Do I know when this is going to happen? No. Do I think it will be soon ... actually no, I don't. Even idiots get some time to make or break it. The shake-up in the CEO gives the new guy some time to make improvements.

... tick ... tick ... tick...

Better banking while bottom-fishing
A better choice would be a regional bank like Banner, which top CAPS player SarahGen believes holds some promise.

Traditional quality community bank with business in Washington, Oregon and Idaho. Small cap plus Regional Bank means it was hit a double whammy in the recent downturn, but both areas are coming back, and regional banks in strong areas like the Pacific Northwest have got to come back the fastest and hardest.

In an interesting comparison, Tom Gardner also chose a Pacific Northwest regional bank for subscribers to Motley Fool Hidden Gems for many of the same reasons, as well as top-quality leadership. A 30-day free trial subscription to the Fool's small-cap newsletter lets you see which regional bank he thinks will be a winner for years to come.

Finding value under rocks
So there you have it -- five low-rated laggards that have gotten a big endorsement from some of the best and brightest investors in the CAPS community. What do you have to say? Will SulphCo be the next big thing, or just an alchemist wasting shareholder money? If you want to add your two cents, sign up to join the Motley Fool CAPS community, which is 100% free.