The Next 5 Stocks to Buy?

With a lineage extending as far back as Alexander Graham Bell, Canadian telecom provider BCE (NYSE: BCE  ) will soon undergo yet another chapter in its storied history. But this one will end with BCE in the hands of a bunch of teachers.

The Ontario Teachers Pension Plan is a huge institutional investor, with $108.5 billion in assets as of Dec. 31. It has interests in a diverse roster of companies, including oil and gas company Nexen, supermarket chain Safeway (NYSE: SWY  ) , Deutsche Telekom, and pharmaceutical giants Johnson & Johnson (NYSE: JNJ  ) and Pfizer. Its $52 billion leveraged buyout of BCE represents the biggest acquisition in Canada's history, and the world's largest LBO ever.

The deal's had plenty of critics. Bondholders sued to block the deal, saying it devalued their bonds by 20%. But after a lower court ruled in their favor, Canada's Supreme Court overturned the decision, saying the board of directors has a responsibility to act in the interest of shareholders, not other stakeholders like lenders or employees.

The deal still has a long way to go before it's finalized -- it's expected to close in December -- and something could always go awry before then. Despite getting clearance from the high court, BCE's shares still trade about 10% below the buyout price, perhaps reflecting investor concern that the credit crisis currently pounding the U.S. will take a wider toll in Canada. Along with the teachers' pension plan, several other private and public entity groups will also participate in the buyout.

Screening for likeability
BCE showed up on a screen of companies that have enjoyed growing investor support these days, after starting off the year on the outs. BCE jumped from a two-star Motley Fool CAPS rating at the start of the year to a three-star rating today, while also enjoying a valuation below that of the market average.

CAPS is a 110,000-member investor community that rates thousands of stocks on whether they will outperform or underperform the market. While it's 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 newly beloved companies the CAPS screener found:

Company

CAPS Rating January

CAPS Rating Today

PE

PEG*

AutoZone (NYSE: AZO  )

**

***

12.3

1.0

BCE

**

***

8.4

5.6

KLA-Tencor (Nasdaq: KLAC  )

**

***

17.0

0.6

Lowe's (NYSE: LOW  )

**

***

10.2

1.1

Trina Solar (NYSE: TSL  )

**

***

17.1

0.2

Source: Motley Fool CAPS; Morningstar.
*For next fiscal year.

Naturally, this is not a list of stocks to buy and sell -- just 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
A purchase of BCE now poses a few risks for investors, such as limited upside potential if the deal ultimately makes it through to December. Moreover, should the deal fall apart, shares could fall. When the lower court initially ruled in bondholders' favor, shares of BCE dropped to $31 a stub -- about 20% below current levels.

Considering the size of the Ontario Teachers Pension Plan, investors like CAPS member Adstan feel the financing is a lock and the deal will be done:

Come on ... this is a guaranteed stock ... the Ontario Teachers Pension Plan will be purchasing BCE for $42.75 ... OTPP is one of the strongest pension plans in Canada... the deal with definitely be going through...I can make the "call"....

Take a CAPS bow
There are many ways to screen for stocks to beat the market. You can use the new CAPS screener to find other stocks you're gonna want to own, but if you want to see what other stocks CAPS investors are marking up to four and five stars, head over to Motley Fool CAPS now -- it's completely free to join.

Johnson & Johnson and Pfizer are Motley Fool Income Investor recommendations. Pfizer is an Inside Value selection. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.


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