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
Biotech investors are a skittish bunch, though not without good reason. What's here today could be gone tomorrow. Just ask Sequenom (NASDAQ:SQNM) investors, who saw their shares gutted after results from the company's Down syndrome test were found out to have been tampered with. The biotech is confident that further testing will validate the original findings, but in the meantime, investors are nursing a stock with losses approaching just 20% of the value they once held.

Yet AMAG Pharmaceuticals might expect the market to cut it a little slack, at least. Its Feraheme iron replacement treatment for patients with advanced kidney disease only went on sale in mid-July. It can't expect sales to be soaring yet, but following the drug's launch, shares have fallen almost 20%. Still, that should provide investors with the foresight to see past market jitters with an opportunity to cash in.

The National Kidney Foundation says iron deficiency anemia is a seriously underdiagnosed condition in kidney disease cases, and it welcomes Feraheme's introduction. The drug will allow a full course of iron therapy treatment to be administered in just a few days, far less time than is needed for competing treatments like Venofer. It will initially target dialysis patients visiting centers run by operators such as DaVita (NYSE:DVA), but if it can also get approval to treat other anemia patients, AMAG has a potential blockbuster drug on its hands that could generate $1 billion in sales annually, according to some estimates.

CAPS member F111Driver is concerned about a generic version of what is actually a competing anemia treatment for which Watson Pharmaceuticals is seeking FDA approval, but AMAG has downplayed that threat: "Competitor Watson Pharmaceuticals just announced a generic version of Amag's primary drug. This company is in serious trouble unless it comes up with a substitute."

As tough as the FDA has been in approving in approving new drugs, AMAG says there are "significant clinical regulatory and commercial hurdles for the entry of any generic iron." Watson will need to prove bioequivalence and show clinical trials demonstrating safety and efficacy. It could be quite awhile before Watson's generic version of Ferrlecit makes it to market.

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.