These 5 Underdogs Are No Dogs

Short-sellers and hedge funds, though sometimes shadowy, are often considered the smartest guys in the room. They did their homework and risked their capital betting against the crowd. While that's not the most popular way to go, the rewards can be quite lucrative.

On Motley Fool CAPS, we've got our own brand of leading analysts who found the chinks in a company's armor and correctly called its fall. "Underdogs" are investors who 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. Yet, just as hedge fund operators don't always go short, we're going to look at recent Underdog picks no matter which way they've called them.

Not every short sale goes as planned, making shorts a risky position to hold. 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 your launching pad for further research.

Underdogs still wag their tails
Several ugly stocks might soon become great opportunities. Casino operators like Las Vegas Sands and Melco Crown Entertainment (NASDAQ:MPEL) haven't seen Lady Luck around the gaming tables lately, as hotel rooms go wanting and Macau employees face visa restrictions. Yet investors stubbornly believe that the recession will ultimately have little impact on such outfits. CAPS member SonicMolson writes that gambling still holds an allure for everyone:

Jobless citizens are going to spend more at casinos in hopes of replacing lost income.
The remaining citizens still have their jobs, and will not stop gambling.
Tourists will flock at the cheap vacation packages.

Investors may also feel they're taking a gamble when they put their money into closeout concern Overstock.com. The e-tailer seems doomed to drop after having to restate all of its financial reports back to 2003. Where other online retailers like Amazon.com (NASDAQ:AMZN) have eventually grown into profitability, CAPS member nuf2bdangrus thinks Overstock.com is a case of good idea with poor execution, ultimately headed for a bankruptcy filing:

Great idea. But they've never made a dime. There appear to be irregularities on their financials. all the time. After Christmas it's going to be big trouble. I bought the cheapest puts for 2010 at the lowest strike price, meaning I think that [bankruptcy] is their destiny. Will it happen by Jan 2010, when my puts expire?

It would seem that a company seeking to make its products the brand name for traditional Chinese medicine -- in a country where such therapies are very much a part of the culture -- is a prescription for success. CAPS member GorillaGorilla thinks that with the stimulus package China has unveiled, spending on traditional Chinese medicine will increase, benefiting American Oriental Bioengineering:

Acquisition company when lots of companies are struggling. This should help through the "recession". Stimulus package in China will increase medical spending 40% Y/Y for the next 5 years - even if we go through a nuclear blizzard. So P/E of sub 8 is looking tasty.

There's no need to fear...
Underdogs can shine brightest when their backs are 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. There's more than you think.