5 Laggards 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 28% gain so far. You'd be up another 43% if you'd followed David Dremen of Dremen Value Management into aerospace and industrial products manufacturer Barnes Group at the end of March.

Over on Motley Fool CAPS, more than 60,000 professional and novice investors alike have rated more than 4,700 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 Dremen 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 95% 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 these 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 some of 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- and two-star stocks have gotten the nod from the cream of our CAPS All-Stars:

I'll have to admit that the value investor in me can't get beyond the large run-up in Research In Motion, even with the renewed strength of its BlackBerry. Same goes for Motley Fool Rule Breakers recommendation Baidu.com, the Chinese Internet search engine.

Bank stocks may be turning attractive again, particularly since many of them have seen their stocks take a hit in recent months (so much so that bottom-fishers might want to start casting their lines here, as Foolish commentator Ryan Furhmann notes). But there may be better alternatives to National City in the likes of its bigger brethren, Bank of America (NYSE:BAC) and Citigroup (NYSE:C).

Finding value under rocks
More interesting to my mind, even though its stock has been discounted the least over the past year, is Pfizer. The pharmaceutical giant has had a number of setbacks, most recently with its oral HIV treatment, maraviroc. Add in a disappointing second quarter that saw revenue slip 6% on a hefty drop in sales of Lipitor -- maybe that's why artificial heart creator Dr. Jarvik has been all over our TV screens lately -- and you have investor disappointment that's been pushing the stock downward.

What remains attractive is Pfizer's commitment to refreshing its drug pipeline, though sooner would be better than later. But in the interim, investors can collect the rich 4.9% dividend.

CAPS investor iamchile sees the drug pharmaceutical as a strong contender:

2006 was not a good year for Pfizer, but the company is far from struggling and there's every indication that a turnaround is on the horizon. Recent estimates have not met expectations, but PFE is still a very profitable company with a more than comfortable operating margin. In 2006, Pfizer posted $48.4B in total revenue with $15B in operating income. What's even more pleasing is the planned dividend increase in the first-quarter of 2007. That's 20 years of straight dividend hikes! Pfizer's an outstanding company currently on hard times. It happens. It's the nature of the industry. And it affords value investors an excellent buying opportunity.

That view seems to be shared by 1Nf1DeL, who believes it will be Pfizer's pipeline that ultimately turns it around.

Pfizer faces the problem of patent expiration on 2 of [its] blockbuster drugs, especially Lipitor. This negativity is compounded by the fact that the drug meant to replace the revenue stream of Lipitor failed to make it through the Phase II trials. Indeed a blow for Pfizer. Considering this backdrop I am not surprised to see a shakeup in senior management.

Nevertheless, Pfizer is a top dog. It is a great company by all means and does not deserve such a pessimistic valuation. It has a fantastic history of paying dividends as well as a rock solid balance sheet. It also is far more efficient moving drugs from Phase II testing to clinical acceptance (increase of 70%)---ironically the most promising block buster replacement did not make it though---and the pipeline is as good as ever.

It's your turn
So there you have it -- five low-rated stocks that have gotten a big endorsement from some of the best and brightest investors in the CAPS community. What do you have to say? If you want to add your $0.02, sign up to join the Motley Fool CAPS community, which is 100% free.

Pfizer and Wal-Mart are recommendations of Motley Fool Inside Value. A 30-day risk-free trial subscription is the prescription for finding all of the market-beating stock picks.

Fool contributor Rich Duprey owns shares of Wal-Mart but does not have a financial position in any of the other stocks mentioned in this article. You can see his holdings here. Bank of America and National City Corp are recommendations of Motley Fool Income Investor. The Motley Fool has a disclosure policy.