7 Stocks You're Gonna Want to Own

• Email
• Share
• Print

When you buy that slinky negligee for your wife at Victoria's Secret and cheerfully submit to the cashier's suggestion that you might like to open an Angel Credit Card account to pay for it, it's not the green-eyeshade types at Limited Brands (NYSE: LTD) who will be running that account. Rather, it will be the folks at Alliance Data Systems (NYSE: ADS) taking part in your purchase of the garment carefully chosen to match the green shade of your beloved's eyes.

Alliance provides marketing, credit, and transaction services to its clients, operating in relative obscurity behind the scenes. The targeted Victoria's Secret mailings that land in your mailbox, the miles you rack up through your AIR MILES loyalty program, and the processing of your credit card payments for that lingerie are just some of the programs Alliance Data runs.

It's been a lucrative business that has enjoyed 21% compounded revenue growth over the past five years, while at the same time earning 38% compounded profit growth. The Blackstone Group was initially interested in taking Alliance private again, and had offered a bid of $81 a share last year. But in today's tight credit environment, Blackstone appears to have grown cold feet and moved to terminate -- once again -- the deal. Alliance is suing Blackstone for a breakup fee because it dragged its feet.

Screening for likeability
Why am I telling you all this? Well, Alliance Data showed up on a screen of companies that have enjoyed growing investor support these days after starting off the year on the outs. Alliance jumped from a two-star Motley Fool CAPS rating (out of five) in January to four stars today.

CAPS is a 100,000-member investor community that rates thousands of stocks on whether they will outperform or underperform the market. While not a predictive service, in its first year of operation the trailing returns of the stocks in the CAPS universe correlated precisely with their relative CAPS ranking. Top-rated four- and five- star stocks outperformed low-rated one- and two-star stocks.

Here are a few of the other companies the CAPS screener found that currently enjoy significant investor support after starting off the year poorly:

Company	CAPS Rating January	CAPS Rating Today	YTD Return
Alliance Data Systems	**	****	(24.6%)
Stoneridge (NYSE: SRI)	**	****	77.2%
Contango Oil & Gas (AMEX: MCF)	**	****	54.2%
Orion Energy Systems (Nasdaq: OESX)	*	****	(40.2%)
Meridian Resource (NYSE: TMR)	**	****	14.9%
Lumber Liquidators	**	****	49.1%
Philips-Van Heusen	**	****	6.1%

Source: Motley Fool CAPS; Yahoo! Finance. January rating as of 1/3/08.

Naturally, this is not a list of stocks to buy and sell, but rather a starting point for further analysis. Investors have raised their outlook significantly on these companies and it may mean there is still room to move.

A fine mesh filter
But let's get back to the story about Alliance. Here's what CAPS players are saying about the company. Back in January, when the Alliance-Blackstone deal met its first kiss of death, CAPS investor catbert234 saw the credit card processor as easily having the ability to go it alone. That undoubtedly holds just as true now that the two are back in divorce court.

With the Blackstone deal all but dead, [Alliance] is once again going to stand on its own merits as a growth stock. The marketing services arm of the business continues to be a driver of growth for the company. Transaction processing remains strong, with customer retention consistent, and the conservative credit decisioning and proactive collections processes should keep losses lower than in other credit-related businesses.

League28 a month ago saw Alliance focusing on its core businesses, a move which has attracted the attention of even high-profile investors like Carl Ichan. 

Restructuring by [eliminating] the utilities arm will allow [Alliance] to maximize their growth engines which have long been the retail and loyalty divisions. This [stock's] also been [beaten] down unfairly in the wake of the Blackstone mess. Recent investments by big players such as Ichan bode well for [Alliance]. It appears they are making the tough decisions that will pay off well for those that are able to see the forest through the trees.

Taking a CAPS bow
There are many ways to screen for stocks to beat the market. Try out the new CAPS screener to find your own winning investments, or, if you want to see what other stocks the investors in the CAPS community have chosen to outperform the market, just head over to Motley Fool CAPS. It's completely free.