These 5 Underdogs Are No Dogs

Short-sellers and hedge funds, though sometimes shadowy, are also sometimes seen as the smartest guys in the room. They did their homework and will bet their capital against the crowd. Theirs isn't the most popular way to go, but the rewards can be quite lucrative.

On Motley Fool CAPS, we have our own brand of leading analysts who found the chinks in a company's armor and correctly called its fall. "Underdogs" are investors who earned 100 or more CAPS points correctly predicting that one or more stocks would underperform the market.

Let's look at some of the recent calls these All-Star investors have made. Yet just as hedge-fund operators don't always go short, we're going to look at recent Underdog picks no matter which way the calls were made.

Underdog	Member Rating	Company	CAPS Rating (Out of 5)	Call
caidencollett07	98.98	Eagle Rock Energy Partners (Nasdaq: EROC)	*****	Outperform
HallShadow	99.34	Time Warner (NYSE: TWX)	**	Outperform
kayakmastr	98.18	Innophos Holdings (Nasdaq: IPHS)	*****	Outperform
synergize	99.26	Fuqi International (Nasdaq: FUQI)	***	Outperform
TrackStifel	95.43	Netflix (Nasdaq: NFLX)	**	Outperform

Not every short sale goes as planned, so going short is a risky position to hold. 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, but rather as the launching pad for further research.

Underdogs still wag their tails
It might be true that the death of luxury has arrived, as high-end goods are inevitably less attractive in a recession, and even the wealthiest are now feeling a bit pinched. Yet that hasn't been the case for Fuqi International, a Chinese producer of precious-metal jewelry, which has seen revenue grow at a compounded annual rate of 72% from 2005 through 2008, even though China has felt the recession's effects just as every other country has. Shares of the jewelry maker have quadrupled over the past three months, from around $5 a share to more than $20.

The shares of other jewelry stores haven't done quite so well but are still impressive. Blue Nile (Nasdaq: NILE), an online retailer of diamonds and jewelry, has watched its share price rising by 86% this year. Tiffany (NYSE: TIF) is up 24% year to date.

Yet Fuqi trades at only 10 times projected earnings, compared with Blue Nile's 47 and Tiffany's 16 times earnings. Considering that analysts anticipate five-year growth for Fuqi slightly above 30%, there seems to be no stopping the expansion. China's nouveaux riches have found themselves flush with cash and apparently are willing to spend it on precious jewelry and gold coins.

CAPS member HarrisonW has this to say about Fuqi: "Low P/E with strong sales and earnings growth as retail spending in China will be much better than anywhere in the world with 10,000,000 people expected to marry in China in the next year. Number1 rated in the IBD Top 100 stocks."

While that growth is certainly impressive, it's been aided by acquisitions that will be difficult to sustain. In the first quarter, revenue grew by 41% year over year. That's a good showing by any measure, but it represents a 77% decline in the rate of growth from the prior year's mark. Such a drastic drop could be a red flag, even when we're talking about phenomenal rates. Often, such slowdowns precede an earnings shortfall.

Last month, CAPS member physicsisphun suggested that at around $14 a share, Fuqi was priced too high for many of those same reasons. Yet that didn't stop the stock from pouring it on even more. And this is exactly why shorting stocks can be a dangerous game: The markets can remain irrational longer than you might be able to remain solvent.

i guess I'm *really* against the grain here, but I think this one is overbought. The stock has had a huge run, is no longer cheap in terms of P/E. ... There's currency risk, too. I might change my tune if it drops near 11, since I think it's basically a good company, but not at this price! After a run like this, a lot of folks might run scared if it starts to drop.