These 5 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.

Let's look at some of the recent calls these All-Star investors have made. Instead of studying more of their pessimistic picks, we'll 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
What the market takes with one hand it gives with the other. Over a year ago, shares of biotech Keryx Pharmaceuticals were boxed around the ears when a late-stage trial of its diabetic nephropathy drug Sulonex failed.

Shares languished below $0.50 a stub for a long time, but just last week, the market looked on them with favor once again. They surged 43% after Keryx announced the Food and Drug Administration had granted its multiple myeloma therapy orphan drug status. Keryx will start late-stage trials by the end of the year, and CAPS member jemsa thinks there's still plenty more room to run.

Orphan drugs treat serious ailments that affect relatively only a few people, and they wouldn't otherwise be profitable for a company to pursue. The designation gives drugmakers a seven-year window of exclusivity as well as tax credits for clinical trials and relief from paying some hefty PDUFA fees.

Of course, Keryx has a long way to go before its stock trades at the levels it was at before last year's failure, but the lack of competition gives it a wide-open field. Investors should remember, though, that once a drugmaker hits the patient ceiling with its treatment, there won't be the same heady growth it achieved early on, so developing its other drug candidate will be key for Keryx.

That other drug is Zenerex, a treatment for patients with end-stage renal disease who suffer from elevated phosphate levels. It should be entering phase 3 trials since mid-stage trials showed that it was well-tolerated and safe for long-term usage. With new management on board and positive developments arising with its drug therapies, Keryx Biopharmaceuticals may hit more high notes in the months to come.

The tail is still going
Another biotech getting a recent boost from the FDA is KV Pharmaceutical, which ran afoul of the regulatory agency when it ignored an order to stop selling cough medicines that contained time-released guaifenesin. The FDA ended up seizing $24 million worth of inventory as a result. The company fired its CEO last December after some other product recalls. Finally, the Department of Justice filed a lawsuit against it to prevent it from selling drugs that failed to meet FDA standards.

Since then KV has worked to clean up its act, submitting a work plan to the FDA to address the deficiencies that were identified. When the regulator accepted the plan, shares of the pharmaceutical shot up 31%. Also, generic drug maker Perrigo (NASDAQ:PRGO) just purchased KV's marketing application for a generic version of an acne medication made by GlaxoSmithKline (NYSE:GSK). CAPS member AllStarPortfolio writes that despite the setbacks it's received, it still has other products for sale that, even in a worst-case scenario, make it a cigar butt worth a puff or two.

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.