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.

Member Rating

CAPS Rating
(out of 5)

noirblood

98.49

Arch Coal (NYS: ACI)

****

jgknot

99.13

Netflix (NAS: NFLX)

**

ahknaten

99.17

Spectrum Pharmaceuticals (NAS: SPPI)

****

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; consider it a launching pad for further research.

Looking to the future
Emerging economies like China's and India's are expected to account for more than two-thirds of global demand for metallurgical coal between now and 2025, according to BHP Billiton, providing a needed long-term boost to coal miners like Arch Coal, Cliffs Natural Resources (NYS: CLF) , and Walter Energy (NYS: WLT) .

But for many investors, it's the more immediate outlook that gets attention. Cliffs, Walter, and Alpha Natural Resources have all cut production forecasts in recent weeks as a sluggish economy has caused worry about demand, and production delays have hampered mining efforts.

For investors who aren't concerned about the next quarter or two, but who like to look five or 10 years down the road (you're the Fool's kind of investor!), the discounted price you're getting on coal companies like Arch makes them a real bargain. CAPS All-Star unicornhunter7 is specifically looking for China and India to push the coal miner higher:

There is huge demand for coal in China and India. A slow economy may hold it back, but we won't be using any substitute within the next 5 years that will be as cheap for them. It even pays a dividend of over 2%.

Add Arch Coal to your watchlist and see if it can dig its way out of the hole it finds itself in.

Qwik to change
Maybe some common sense is returning to movie rental king Netflix. Less than a month after it revealed the awful decision to split its DVD-by-mail rental service from its online streaming business -- and worse, to devalue its brand by renaming the mail-order business "Qwikster" -- Netflix announced it has decided to keep the two services together under one name and one website.

It was a PR nightmare for Netflix, one that Coinstar (NAS: CSTR) and even bankrupt Blockbuster have been cashing in on. But let's not think the rental giant came completely to its senses. It's still keeping in place the price increase it pushed through, which led to its losing many members. Subscriber estimates slid from an expected 25 million members, down to 24 million. So although it may have lost additional subscribers by dividing the company, it also lost a large swath based on price increases, and the latest reversal isn't likely to bring them back.

The problem I see here is that while Netflix admitted the Qwikster nonsense was a mistake, it refuses to budge on the bifurcated revenue streams for DVDs and streaming. The future may be streaming, but it's not here yet. Many feel that Netflix's streaming library is woefully inadequate, and although Netflix says most viewers watch TV shows, not movies, it could be because the depth of its movie library doesn't even reach your ankles.

You can follow along by adding Netflix to your watchlist and see whether it can get its name back up on the marquee.

Can't touch this!
The drama of AMAG Pharmaceutical's courtship of Allos Therapeutics (NAS: ALTH) got more dramatic as one of AMAG's largest shareholders increased his ownership stake to just under 6% as he positions himself to stop the union. Chances are he'd like Spectrum Pharmaceuticals to step in and whisk the biotech away.

Allos says an unnamed suitor has been courting it with more money, and speculation is it's Spectrum doing the wooing. With Allos having only one drug on the market, Folotyn, and sales of it doing poorly, it's understandable why the investor might be hesitant about wanting AMAG to jump in. More unclear is why Spectrum would want to follow AMAG into the breach (assuming it's the company), though it may be eyeing the company's pipeline, even if only one of the candidates is in late-stage development.

I'm among the 97% of those rating Spectrum on CAPS believing it will go on to outperform the market. Would opinions change if Spectrum buys Allos? You can tell us on the Spectrum Pharmaceuticals CAPS page or in the comments section below, and then follow the buyout bids by adding the stock to the Fool's portfolio tracker to watch its progress. 

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 contributorRich Dupreyholds no position in any company mentioned.Click hereto see his holdings and a short bio.Motley Fool newsletter serviceshave recommended buying shares of Coinstar, Walter Energy, and Netflix.Motley Fool newsletter serviceshave recommended creating a bear put spread position in Netflix. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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

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