3 Stocks Ready to Roar

There are plenty of strategies for picking stock winners: low P/E stocks, companies selling at a discount to cash flows, and more. Analysts for the small-cap stock-picking service Motley Fool Hidden Gems are beating the market by 19 percentage points by finding undervalued stocks that the market and investors have ignored.

What if we could find a way to whittle down our list of prospects beforehand, finding those whose engines are just getting warmed up?

Using the investor intelligence database of Motley Fool CAPS, I screened for stocks that were marked up by investors before they began a run-up of 20% or more over the past three months. That underscored the results from the first year of data, which suggested that CAPS' highest-rated stocks performed best, while its lowest-rated companies fared worst.

My screen returned 18 stocks when I ran it and included these recent winners:

Stock

CAPS Rating Jan. 18

CAPS Rating April 18

Trailing 13-Week Return

Cardica (Nasdaq: CRDC  )

**

***

21.9%

Coldwater Creek (Nasdaq: CWTR  )

**

***

30.7%

LSI (NYSE: LSI  )

**

***

21.7%

Source: Motley Fool CAPS Screener; price return from April 18 close to July 17 close.

While that tells us which stocks we perhaps should have looked at three months ago, what we want are the stocks that we ought to be looking at today. So I went back to the screener and looked for stocks that just bumped up to three stars or better in CAPS, sport valuations lower than the market's average, and whose price hasn't increased by more than 10% over the past month. That gave me 37 stocks that are still attractively priced but which investors think are ready to run today. Here are three of them:

Stock

CAPS Rating June 17

CAPS Rating July 17

Trailing 4-Week Return

P/E Ratio

iStar Financial (NYSE: SFI  )

**

***

(23.1%)

8.1

Lowe's (NYSE: LOW  )

**

***

(15.3%)

10.8

SUPERVALU (NYSE: SVU  )

**

***

0.4%

11.5

Source: Motley Fool CAPS Screener; price return from June 20 close to July 16 close.

Let's take a look at why investors might think these companies will go on to beat the market.

iStar Financial
On the surface, it seems difficult to reconcile increasing investor support for the Motley Fool Income Investor pick with the recent announcement that the company will increase its loss reserves for the quarter because of continued deterioration in the credit markets. Yet some top-rated All-Star investors like CAPS member pjani06 see iStar Financial's low stock price as an excellent entry point to its exceptionally high 30% dividend yield.

A financial that has a solid capital base (not falling apart like other financials), has plenty of inside owners (that are not dumping the stock), are expected to have profits this year, next year, and all quarters in between ... AND ... have an insanely high dividend rate which can be taken advantage of NOW. A dividend dreamer.

Lowe's
Archrival Home Depot (NYSE: HD  ) scared off many customers with its customer service, and it hasn't been easy getting them to return. With Lowe's stock about 40% off its highs, investors like CAPS member SARdMc figure that when the housing market recovers, Lowe's will be sitting pretty with even less competition. Here's an excerpt:

I have seen more Ace Hardware and "Mom & Pop" hardware stores go out of business in my area than I can shake a stick at ... Right now the home improvement business is morphing into a duopoly and for my money, it might as well be a monopoly. There is no comparing the shopping "experience" at [Lowe's] to a Home Depot. It just seems more appealing to the average Do-It-Yourselfer. I personally drive right past a HD to get to [Lowe's] and I am probably not the only one. I have always heard to invest where you shop and this stock [definitely] fits that bill.

SUPERVALU
With a number of deep-discount chains like Sav-a-Lot and Acme, supermarket giant SUPERVALU has undoubtedly been benefiting from shoppers trying to stretch their dollars. Although its Albertson's acquisition weighed it down, investors like CAPS member FGunawan find it a particularly cheap, defensive stock. "A defensive stock with growth potential at a low valuation? This company's stock is just as good a bargain as the products it sells at its supermarkets."

Three for free
That's what investors are saying about these three stocks, but there are thousands of stocks in the universe: Have we heard from you? Why not head over to the completely free CAPS service and let us hear what you've got to say about any stocks that you think are starting to rev their engines?

iStar Financial is a Motley Fool Income Investor pick. Home Depot is an Inside Value recommendation. 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. The Motley Fool has a disclosure policy.


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