Piggybacking on the picks of successful investors and money managers can often lead to big rewards -- especially when the stocks in question are beaten down. If Warren Buffett is buying railroads, perhaps you should look there, too. Does Bill Miller think financial stocks are beaten down? Maybe investigating more closely will help improve your own results.

At Motley Fool CAPS, our top-rated All-Star players represent the best 20% of more than 81,000 professional and novice investors. I'm looking among them for those who've chosen one- and two-star stocks to outperform the market. The majority of CAPS investors might consider these stocks losers, but if our ace contrarians think otherwise, these picks might be worth a look.

These four low-rated stocks recently got the nod from the cream of our CAPS investors:


CAPS Rating

1-Year Return

CAPS All-Star

Player Rating

Discovery Labs (Nasdaq: DSCO)





Ford (NYSE: F)





Vonage (NYSE: VG)





Countrywide Financial (NYSE: CFC)





Often, there's a low-rated stock that has enjoyed a large one-year run-up in its stock price, leaving me leery. Sure, stocks can continue to run, but these picks' high valuations -- and low ratings -- leave me cold. Not so this week, as the best we have is Discovery Labs and its relatively small 15% drop.

Discovering a reason to invest
Despite being the "best of the worst," Discovery Labs seems to have a dickens of a time finding revenues. In fact, it has none. Last month the company had a secondary offering to raise more cash. Yet we should not be surprised, considering that the biotech is in R&D mode and counting on its one product, Surfaxin -- which treats the sometimes fatal respiratory distress syndrome (RDS) in infants -- to get to market and succeed. The drug is the subject of an approvable letter from the FDA.

The potential for the drug, if and when it does hit the market, seems large. According to the American Lung Association, RDS affected 24,000 infants in 2003. Surfactants are fluids produced by the body to coat the lungs as the air sacs expand. Typically when babies are born prematurely, their bodies haven't produced enough surfactants to expand their lungs sufficiently, and they suffer from RDS, which is characterized by rapid breathing, grunting, and the blue lips that indicate a lack of oxygen. Mortality from RDS has declined significantly since the 1960s, but the condition remains the seventh-leading cause of death in infants.

Clinical tests show that Discovery's Surfaxin has a significantly higher survival rate over both Abbott Labs' (NYSE: ABT) Survanta and Merck KGaA's Curosurf, which neonatologists consider to be the best treatment, Discovery says. Surfaxin will still have a difficult time securing approval because the other treatments are fairly entrenched. According to market researchers at IMS, Curosurf has a 44% market share in 2006.

Those CAPS investors who rate the biotech as an outperform recognize that its success hinges on ultimate FDA approval of Surfaxin. Without it, Discovery Labs is destined for further residence in penny stock land. Here's new player mburke1183's analysis.

This is purely a speculative play on FDA approval of surfaxin. I believe the company has finally shown the ability to stabilize in storage for over six months and should receive approval. If this occurs this stock could be worth between six and seven dollars a share. If they are denied it will plummet back into the [85] cent range. This pick should only represent a small portion of [anyone's] holdings.

Last year, when market researchers at Netscribes gave Discovery a thumbs-down, they too noted future potential rested with Surfaxin's approval. But with the company having to pull its application in Europe, Netscribes noted that the immediate future did not look promising: "There seems to be a bleak possibility to generate profits in the near term, making Discovery an underperformer in the near term."

Finding value under rocks
So there you have it -- four low-rated laggards that have big endorsements from some of the best and brightest investors in the CAPS community -- although some are not so sure. To add your two cents on these or any other companies, sign up to join Motley Fool CAPS, absolutely free.

Fool contributor Rich Duprey does not have a financial position in any stock mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.