These Underdogs Are No Dogs

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Short-sellers and hedge funds may be shadowy, but sometimes they're 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 also have 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 that 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)

cvdynasty099.97Honda Motors (NYS: HMC) ****
cecamadocv1100.00McDermott (NYS: MDR) *****
InflationSilver99.98Sprint Nextel (NYS: S) **

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.

Searching for a solution
Although auto sales are at an eight-month high in October, the industry is not recovering evenly and Japanese automakers are still struggling with the aftermath of the earthquake and tsunami earlier this year. While Volkswagen led the pack with a 40% gain and Chrysler was up 28%, Honda Motors said sales were flat and Toyota (NYS: TM) reported an 8% decline.

It might seem incongruous that Nissan was up 18%, but its Infiniti brand, which is sourced in Japan, was down 13.5%. The Nissan nameplate, which, as it turns out, is mostly built in North America, soared 22%. It also shows the folly of trying to assign labels to carmakers based on geographic region.

Honda's results were affected by its decision to cut back on incentivesmore so than other auto companies as it rebuilds from the quake, but it faces the other Asian calamity of widespread flooding in Thailand. So severe is the devastation that it will dramatically cut into Honda's operations and leave it incapable of providing guidance for the year.

The best thing going for Honda right now is that it's not Toyota. That carmaker also has extensive Thai exposure, its reputation still needs to be rebuilt, and much of its vehicle lineup has been uninspiring.

CAPS All-Star member MajorBob04 says Honda has its work cut out for it, though in the long run it should motor on.

Honda will suffer from parts shortages and production gaps for several months. Customers will get frustrated so their satisfaction and loyalty will suffer. Longer term I think they will rebound even better than most investors think, but HMC will [struggle] for awhile.

Add Honda to your watchlist and see whether it can drive back into the fast lane of growth.

Hanging up on wireless
Engineering and construction firm McDermott says its third-quarter results aren't indicative of what it can and will achieve, which is a good thing, considering the beating it took after revenues from its Middle East operations fell 30%. While the back half of the year will be weaker than the front, things should begin changing.

There's a lot of pent-up demand that needs to be met from projects that were delayed as a result of the recession. According to the industry analysts at Deloitte, Middle East oil companies will be responsible for $140 billion worth of contracts awarded this year, and it will see explosive growth over the next five years, particularly as the national oil companies move offshore to supplement and replace maturing onshore fields.

Fluor reported winning contracts last month for new offshore facilities in Abu Dhabi, and Maersk will do BP's (NYS: BP) work off of Egypt. With a substantial proportion of McDermott's revenues coming from the region, it's likely to receive a good portion of those funds, too.

CAPS member stallionre is confident in the E&C specialist's ability to recover.

This stock will climb. It had a bad earnings report in October, but will climb for sure. It is a strong company with much profit, cash on the books and many billions of dollars of future bids. This stock will start climbing in December if [not] sooner.

Add McDermott to your watchlist, and let us know on the McDermott CAPS page whether you think its transition from a shallow-water and mid-water-level construction and engineering firm to one that focuses on subsea and deepwater work will to lift it to new heights.

Can't touch this!
Will Apple's iPhone be enough to salvage what's left of Sprint? Standard & Poor's doesn't think so, as the need to take on more debt to upgrade its network to accommodate the smartphone (it doesn't work on the WiMax system Sprint used through Clearwire (NAS: CLWR) ) will further pressure its profit margins.

Not only does Sprint have to upgrade, but it also has to support Clearwire in the process and may use some of the proceeds from a debt offering to do that. It definitely has a full plate, including opposing AT&T's (NYS: T) merger with T-Mobile.

CAPS member rymico says ridding itself of WiMax will allow Sprint to effectively compete once and for all and may make it attractive to someone else: "Possible take-over target and things will improve in their wireless division once they finally cut Wi-Max and fully realize LTE."

You can tell us on the Sprint CAPS page or in the comments section below whether you think it will disconnect, and then follow along by adding it to the Fool's 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 contributorRich Dupreyholds no position in any company mentioned. Check out hisholdings and a short bio. The Motley Fool owns shares of Apple.Motley Fool newsletter serviceshave recommended buying shares of Apple and creating a bull call spread position in Apple. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't 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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