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.

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 consider these ideas as automatic buys or sells -- just as the launching pad for further research.


Rough seas ahead
Political uprisings in Europe could spell doom to fragile shipping industry players such as DryShips (NAS: DRYS) that are counting on things getting better to boost demand, not worse.

The rise and electoral success of extremist parties and candidates in European elections who reject the austerity measures needed to put the continent back on a firmer financial footing ensure there will be fewer politicians in the future who will risk their careers touting the policies necessary to correct the coming collapse. Election victories by a socialist president in France and better-than-expected showings from both a Communist Party and a Neo-Nazi group in Greece herald an era of sovereign insolvency.

Particularly worrisome are the implications for Greece. Its economy is a shambles, unemployment runs north of 21%, and its bailout package -- as weak as it was and based on pie-in-the-sky assumptions -- is now in doubt. Office vacancy rates in Athens hit 20% in the first quarter, while tourism has collapsed as foreign bookings plunged 12% this year.

With that as a backdrop, it's hard to muster any enthusiasm for companies reliant on recovery, such as dry bulk shipper Excel Maritime, which just reported earnings that showed losses exploding to $36 million from $1 million a year ago as revenues dropped by a third. Diana Shipping (NYS: DSX) , while still profitable, saw its earnings fall by 39% as time charter revenue tumbled 17%, and analysts are expecting DryShips to experience a similar 40% decline in profits. But as with Europe, things could get worse for DryShips before they get better.

Last year, DryShips actually generated more revenue from its oil drilling subsidiary Ocean Rig than it made from shipping dry bulk goods, but it has been selling off its stake in the subsidiary in an attempt to shore up its finances by raising cash. Highly rated CAPS All-Star griderX had been counting on the drilling business to keep DryShips afloat, but as Pirate38 notes, the company is hemorrhaging cash and will end up getting swamped: "They are bleeding money. The sale of [Ocean Rig] is a temporary fix to a [financial] statement that spends more than it earns."

That's part of the rationale behind my own rating of DryShips to underperform the market, but also because with Europe in turmoil I'm not convinced China won't have a hard economic landing as well. Add DryShips to your Watchlist and let us know in the comments section below whether the dry bulk shipper will ride out the storm by concentrating again on its core business.

A bubble ready to pop?
There are many Chinese companies that would also be affected by China's GDP falling more precipitously than expected, and even top-dog search engine Baidu.com (NAS: BIDU) could be one of them.

Its lead in search is currently unassailable, so it doesn't need to worry yet about Sohu.com's (NAS: SOHU) Sogou offering even though the latter enjoyed a 184% increase in revenues compared to Baidu's 75% jump. Sohu has some sand in its gears yet that is causing some of the machinery to grind to a halt. However, a recent Investor's Business Daily report noted that with venture-funded companies being a big source of advertising for these portals, economic decline could lead to lower revenues.

Yet it might also spur more mergers and acquisition activity of the sort that saw Youku.com snap up Toudu and had Baidu agreeing to include SINA's (NAS: SINA) Weibo microblog among its search hits. It's also hashing out better pricing terms for video with Sohu and Tencent.

Although a tough economy does hit everyone in some fashion, Baidu certainly seems financially sound enough to survive and outlast the competition, which would solidify its leadership position. CAPS All-Star ll0o0ll still finds search to be a growth business, which is why philomore says it's highly unlikely anyone can ascend to the heights Baidu has:

Will someone compete with Baidu for China's search market? Probably. Will they succeed? Not likely. Google's early missteps could prove unrecoverable as millions of new users grow more familiar with Baidu every day.

Add Baidu to the Fool's free portfolio tracker and search for other opinions on the Baidu.com CAPS page on which way its shares are likely to go.

There's no need to fear...
Underdogs often shine brightest with their backs against the wall, but The Motley Fool has come across a different stock that has it so excited they've dubbed it "The Motley Fool's Top Stock for 2012." A special free report for investors to uncover this up-and-coming player is available to access right now and highlights a company that is revolutionizing commerce in Latin America. Get instant access to the name of this company by clicking here to download it now.

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. The Motley Fool owns shares of Baidu.Motley Fool newsletter serviceshave recommended buying shares of SINA, Sohu.com, and Baidu. The Motley Fool has adisclosure policy.We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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