These Underdogs Are No Dogs

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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.

Underdog

Member Rating

Company

CAPS Rating (out of 5)

JakilaTheHun99.92Arcelor Mittal (NYS: MT) *****
dwot99.82Corning (NYS: GLW) *****
translator99999.97SeaDrill (NAS: SDRL) *****

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
As we've been hearing in the presidential debates, uncertainty in fiscal and economic policy causes businesses to rein in their spending to see which way the wind blows. The same is true of the financial crisis in Europe when fiscal uncertainty has led business to keep its powder dry causing a ripple effect through the economy.

The world's largest steelmaker, Arcelor Mittal, is suffering from the fallout associated with the widespread doubt of which domino is next to fall. Its customers built up inventory earlier this year, leading the steelmaker to expect shipments to decline in the second half of the year. As a result, it's also shutting down a German blast furnace to wring as much capacity utilization out of its remaining plants as it can.

Slack steel demand is also taking down U.S. Steel (NYS: X) and POSCO (NYS: PKX) , whose shares have fallen 35% from recent highs. Patient investors like CAPS member shthpns8 believes fortitude is necessary to wait for the rebound that will come: "It is well diversified for its field and has great potential as it is setting itself up to be a giant once the markets start to rebound and the need for steel sky rockets again."

Weld your opinion to the Arcelor Mittal CAPS page and add the stock to your watchlist to keep tabs on when the recovery begins.

The big picture
The collapse in LCD TV sales has weighed heavily on glassmaker Corning, which derives 38% of its sales but nearly half of its profits from LCD technologies. But don't bet against the stock just because 3D and Internet-ready TVs have yet to reach critical mass. Corning's telecom segment accounts for another quarter of its sales, though it generates only about half the profits, but Verizon (NYS: VZ) has been buying up as much fiber optic cable as the glassmaker can produce as it rolls out its FiOS service.

The diversity of its products, the popularity of its Gorilla Glass (will it be in the iPhone 5?), and its low valuation -- Corning trades for just 6 times forward estimates and 5 times trailing earnings -- make it a value investor's pick. It is Corning's innovative qualities that attract CAPS member shthpns8.

Their dedication to their products and most importantly, their dedication to always improving and innovation for the future of their company is a foundation for any investor. These people know how to run a true business. Their diversification of their products and services highlights this company's long-term value.

Add Corning to your watchlist and see whether consumers will tune in to next-generation TVs as the holiday shopping season looms.

A crash landing?
Offshore-drilling contractor SeaDrill disappointed investors with its second-quarter performance, but year-over-year comparisons are tough these days because of the Obama administration's permit moratorium that upset the industry equilibrium. Profits came in well ahead of expectations, though, even if revenues fell short, but SeaDrill offered up a fairly positive outlook for the future.

Looking at the results of Noble (NYS: NE) , for example, it reported a 12% drop in revenues as operations were hurt by the downtime from two rigs. SeaDrill's high-quality drilling units will find a ready market in the wake of the Deepwater Horizon disaster as regulatory overseers aren't as readily tolerating mechanical failure since even with redundancies built in, BP still witnessed a calamity.

Of the 110 CAPS All-Stars weighing in on SeaDrill, not one thinks it won't beat the market. Member FourBees says investors will be rewarded for their support.

This company has a huge dividend that is supported by earnings largely from long term contracts. Oil prices will go up and down, but there is little effect on the company unless they go through the floor. I think this is extraordinarily unlikely. I can't find any reason this is not an incredible value.

I agree with the long-term bullish case for the contractor and have indicated so on the SeaDrill CAPS page. You can also add the stock to the Fool's free portfolio tracker.

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.

At the time this article was published Fool contributor Rich Duprey holds no position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of Noble. Motley Fool newsletter services have recommended buying shares of Corning. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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