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Surprising Low-Rated Stocks the Leaders Love

By Rich Duprey - Updated Apr 5, 2017 at 5:26PM

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Smart investors who achieve outsized profits: See what the best CAPS players recommend now.

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.

For instance, 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:

Company

CAPS Rating (out of 5)

1-Year Return

CAPS All-Star

Player Rating

Overstock.com (NASDAQ:OSTK)

*

72.6%

LBStarling

99.62

RadioShack (NYSE:RSH)

*

7.7%

billator

99.23

Vonage (NYSE:VG)

*

(63.3%)

fzpd95

99.38

Salesforce.com (NYSE:CRM)

*

9.7%

PiotrNielsen

96.91

US BioEnergy (NASDAQ:USBE)

*

(53.9%)*

tmsi

99.62

*US BioEnergy began trading on the Nasdaq exchange on Dec. 15, 2006.

Typically in these lists, I'll find a low-rated stock that's also enjoyed such a large one-year run-up in its stock price that it leaves me leery of considering it as a possible investment. Not that stocks can't continue to run, but high valuations -- even with their low ratings -- leave me a little hesitant. While Overstock.com's annual gain isn't as high as some other low-rated stocks we've looked at in the past, the company's legal pursuit of two hedge funds -- and presumably not the Sith Lord -- may once again distract management from the job of running the business.

Although two other stocks have been knocked way down over the past year, neither of them seems to inspire much confidence either. Vonage is clinging to life, despite a big run-up yesterday. Meanwhile, U.S. BioEnergy is caught up in the maelstrom of higher prices, too many products, and limited capacity that's knocking back many alternative fuel companies. Just last week, Aventine Renewable Energy (NYSE:AVR) appeared on this list.

Salesforce.com, even with some pundits ruminating on the benefits of a Microsoft (NASDAQ:MSFT) buyout, sports a very lofty market valuation. As All-Star JR10022 notes:

I understand paying a premium for hyper-growth, but I don't understand why anyone would pay for a PEG OVER 9...I'll put it to you this way - the high earnings estimates for '08 and '09 are .12 (average is .10) and .40 (average is 28)...which means even if you assume they meet the most optimistic numbers the P/E for those years would still be in the triple digits ...

Which leaves us with electronics retailer RadioShack. With many electronics retailers suffering from limp sales, the Shack's own lousy performance last quarter is not so startling. While the bears have made compelling arguments that the company operates in a niche out of its league, as All-Star Jeffreyw stated earlier this year, time is necessary to give new management a chance.

Radioshack is headed by a turnaround specialist who will either rebuild the company or sell it off profitably, pretty much a can't lose situation (if there is such a thing!) People smarter than me have more at stake on this one, I'll trust they don't lose money on it!

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.

Microsoft is a Motley Fool Inside Value selection. Get a 30-day free look by clicking here.

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

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Stocks Mentioned

RS Legacy Corporation Stock Quote
RS Legacy Corporation
RSHCQ
Overstock.com, Inc. Stock Quote
Overstock.com, Inc.
OSTK
$28.94 (1.94%) $0.55
Salesforce, Inc. Stock Quote
Salesforce, Inc.
CRM
$190.17 (-0.57%) $-1.10
Vonage Holdings Corp. Stock Quote
Vonage Holdings Corp.
VG
Microsoft Corporation Stock Quote
Microsoft Corporation
MSFT
$282.91 (-0.26%) $0.74

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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