These 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. However, we're going to 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.

Source: Motley Fool CAPS.

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
If my stepdaughter's buying habits are any indication, it's little wonder that Abercrombie & Fitch showed narrower losses last quarter. Not because she's buying clothes from its eponymous stores, but rather she's been hitting its lower-cost Hollister brand.

Abercrombie seems to realize that if it wants to compete successfully against Aeropostale (NYSE: ARO) or American Eagle Outfitters, it's going to need to offer a better price point to attract consumers. It's been building out the Hollister line while closing Abercrombie & Fitch ones, but both brands have suffered from declining sales in the mid-teen range during 2009, and Hollister's comps were down by a wider margin than ANF's.

Highly rated CAPS All-Star member UltraLong isn't one of those who thinks Abercrombie's management has seen the light just yet, and with valuations significantly higher than better performing rivals, it's not a stock to pick here:

Are you really willing to pay more than 20 times 2011 earnings for a company that is losing a sea of customer to Aeropostale? Not to mention that ANF is trading at obscenely overbought technicals...it hasn't seen deviations like this as far back as I can see. Everything points to an inevitable rollover here. It may during their next same store sales figures, but I think it revisits $39 at least. [Note: the stock is now trading below $39 again]

All booked up
Up till the Iceland volcano wreaked havoc on European flight plans, priceline.com was one stock that simply confounded the experts. Despite an overwhelmingly negative outlook on it, the name-your-own-price travel agent had managed to exceed expectations again and again as the recession provided plenty of availability for plane tickets and hotel rooms.

Even priceline admits a more robust economy and other factors will hamper its ability to post gains as aggressive as they have been, while ash clouds are leading to flight cancellations that may have a more immediate impact. Unrest in Thailand is doing no favors for its Asian travel business Agoda.

When HLChin marked priceline to beat the analysts and the market again, he noted there were three legs on which it solidly stood: its business, financials, and valuation, all of which looked strong. Yet even he recognizes the risks that confront the travel agency, such as Greece coming unglued and new competition from Microsoft (Nasdaq: MSFT) and Google (Nasdaq: GOOG) in the online travel space.

There's still heavy sentiment against priceline beating the market, with 28% of those rating it looking for it to underperform. Travel to the priceline.com CAPS page and book your opinion for its future.

A golden opportunity
Despite having rated Sears Holdings to underperform the market on CAPS, I'm coming to the opinion that now might be the time to switch horses -- and it has nothing to do with my negative score on the retailer. Rather it's because Sears wants to be a pawn broker.

Apparently it's having difficulties overcoming the competitive moat of Wal-Mart (NYSE: WMT), so Sears now it wants to get into the cash-for-gold business. Both its Sears and Kmart stores will allow customers to exchange their gold jewelry for cash. This either suggests management thinks gold is set to soar to every greater heights, or it's an indicator the gold bubble is about to burst since even venerable retailers want you to pawn your family jewels at its stores.

CAPS member Endeavor1 thinks while everything else is running against the retailer, perhaps a change of direction might be worthwhile:

The confluence of the general business model, lack of unique story, aging portfolio of everything and high valuation seem to provide a plus/minus list full of minuses against a "rising tide" story that doesn't necessarily favor them at all. I think you need to be patient, but this seems like free money down to whatever price would put the P/E in the low 20s.

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.