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.

Today I'm looking at Spanish banking giant Banco Santander (NYS: SAN) , which has recovered almost 50% of the ground it lost after falling from its highs. Benefiting from Europe's commitment to defend the euro just as it announced its second-quarter earnings, not only did its stock soar, but it also rose sharply in the estimation of CAPS members, who boosted its rating from two to four stars. So if investors who've scored big by correctly predicting which stocks will fail, it may be worth our while to check out those they think will succeed.


Banco Santander snapshot

Market Cap $1.3 billion
Revenues, TTM $3.4 billion
1-Year Stock Return (4%)
Return on Investment NA
Estimated 5-Year EPS Growth 17.5%
Dividend and Yield $0.81/11.4%
Recent Price $7.13
CAPS Rating (out of 5) ****

Of course, not every short sale goes as planned, which makes shorting a risky proposition. Stock prices can be irrational longer than you have money to stay in the game. And you don't want to end up with fleas by lying down with dogs, so do your homework.

Don't bank on it
Europe may officially be back in recession, though anyone watching events over there would have figured that out a while ago. But manufacturing and services contracted sharply last month, while retail sales stumbled after a period of modest growth. Even Germany, which has heretofore been propping up the rest of the continent's economy, is sliding further into the abyss, hitting lows not seen in three years.

That's not a good omen for Banco Santander or Spanish banking peers such as Banco Bilbao (NAS: BBVA) , which are counting on Europe's recovery to pull them up. Spain's economy is still in freefall along with fellow ne'er-do-well Italy.

A silver lining
If there's any ray of sunshine, it's that the Iberian 25% unemployment rate may finally have bottomed, as new claims tumbled less than they have previously. Additionally, Spain's economic minister predicts the country won't need the full $126 billion Europe set aside to bail out the industry. Naturally, that excludes Bankia, the financial institution the government took over and into which it will be injecting another $6 billion right away. Critics of the process, however, contend that by not taking the full bailout, Spain is merely trying to avoid as long as possible the loss sharing by bondholders required under the financing.

The economic woes have weighed heavily on Spanish banks as requirements to address the huge loan losses that reside in their balance sheets threaten their solvency. Santander saw its earnings plummet 93% as the cost of ridding itself of bad loans surged, while Banco Bilbao's profits tumbled 58% after it set aside $1.3 billion to cover losses.

Celebrate diversity
Yet half of Santander's revenues come from Latin America, as do its profits, where Brazil accounts for a quarter of the total. While that has allowed Santander to sidestep much of the crisis that has plagued the rest of Europe's money centers, as Brazil's economy flags it could pressure margins. It has also prompted speculation it may be willing to sell off assets to raise needed cash. Some suggest Brazil's Itau Unibanco (NAS: ITUB) may wish to buy its U.S. unit or the domestic division of Societe Generale, or Royal Bank of Scotland (NYS: RBS) , though Itau has denied the latter.

Itau's rival Banco Bradesco (NYS: BBD) believes organic growth is the path to winning market share, and both it and Santander are seeking to capitalize on the delays engendered by Itau's acquisition of Unibanco. Bradesco is almost of equal size now, with Itau while Santander enjoyed a 6% increase in deposits in Brazil last quarter.

Unfortunately, I don't see Spain's woes relenting anytime, and though I believe Brazil's economic landing will be softer than feared, the precarious financial condition of Santander makes its current share gains seem tenuous. No doubt should the euro survive another year, the balance sheets will look much healthier in comparison, but expecting the eurozone to remain as is seems doubtful.

I've already marked Banco Santander to underperform the broad market indexes, but let me know in the comments section below if you agree it is a dog riddled with fleas or whether you think its diversification will allow it to emerge stronger.

There's no need to fear ...
Banks -- domestic or international -- may still be a fearful bunch to invest in, but The Motley Fool has one that shouldn't give you the willies as it's pursued a conservative lending path. The free report "The Only Big Bank Built to Last" is available for immediate access. Find out which one stands out as a paragon of rectitude in an industry not known for its piety.

The article Is Banco Santander an Underdog -- or Just a Dog? originally appeared on Fool.com.

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

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.


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fabijosy

the market cap of sandanter is listed at 62.3 billions on aol,This is a far cry from what you listed above(1.3).Sandanter has extensive operations in all of latin america including mexico.It also has operations in the us.It has sold some bad debts and some units and i believe it will survive and thrive as one of the bigest and most properest banks in the world.

November 01 2012 at 3:22 PM Report abuse rate up rate down Reply