Surprising Low-Rated Stocks 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 Buffett's finding opportunity in bonds, 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.

Over on Motley Fool CAPS, our top-rated All-Star members represent the best 20% of our more than 110,000 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 may consider these stocks losers, but if our ace contrarians think otherwise, these picks might be worth a look.

Here are a few stocks that have gotten the nod from the cream of our CAPS investors:

Source: Motley Fool CAPS; Yahoo! Finance.

Building a foundation
During the housing boom it was easy for builders to expand beyond their core competencies. Instead of just building houses, they got into speculative land ventures and erected mortgage arms to compete with brokers. It took the industry's implosion for homebuilders to realize, "Oh yeah, we're builders." Centex was no different and it's been paying the penalty for its and the industry's excesses, though it has said, as have others like Beazer Homes (NYSE:BZH), that it will focus again just on building houses.

Amid a landscape that even companies admit might last until 2009, investors like CAPS member feiled see Centex looking more like WCI Communities, which just declared bankruptcy, than like Meritage Homes (NYSE:MTH) which has provided investors with a glimmer of hope.

Anyone else see a problem here? Home building-dead market, foreclosures, excess inventory and increasing material costs = nothing good for quite some time. Financial services-Ahhhhhhhh!! Subprime fiasco, foreclosures, jingle mail, bear market, rising commodities cutting into disposable income = nothing good for quite some time. Construction services-slowing economy and rising commodities = nothing good for quite some time.

A taxing decision
Even though Buffett dumped his shares last year, H&R Block has a few loopholes to exploit that may yet make it a winning investment. It has a new CEO, closed its mortgage division (seems everyone and his brother was a mortgage broker at one time), and rival Jackson Hewitt (NYSE:JTX) may be in even worse shape than H&R Block is.

It has created a competing atmosphere among investors on which line item Block will itemize. CAPS members like HARTLESS63 see the chance for profits at the tax prep leader to stabilize: "Profitability should stabilize now that H&R has closed the sale of its Option One Mortgage Corp. Looking long term as new CEO has not yet announced earnings guidance beyond fiscal 2009."

Others like Comptopher find the thesis as compelling and hopeful as an IRS audit.

The only reason to go to H&R block is to get their instant refund, payday loan syle. The IRS is going to take that away and TurboTax, et al will siphon off the rest of the business. As people get more Internet savy and the do-it-yourself tax programs get better, H&R's business will continue to erode away.

Finding value under rocks
So there you have it -- five low-rated laggards that have gotten big endorsements from some of the best and brightest investors in the CAPS community, although there are always some who are not so sure. It pays to start your own research on these stocks on Motley Fool CAPS. 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. If you want to add your two cents on these or any other firms, sign up to join Motley Fool CAPS, absolutely free.