3 Stocks Ready to Roar

There are plenty of strategies for picking stock winners, from finding low P/E stocks to seeking companies selling at a discount to their future cash flows. At the small-cap stock-picking service Motley Fool Hidden Gems, even in this market, the analysts stay ahead of the pack by finding undervalued stocks that Wall Street and investors have ignored.

But what if we could whittle down our list of prospects beforehand, to find those whose engines are just getting warmed up?

Using our investor intelligence database at Motley Fool CAPS, I screened for stocks that were marked up by investors before their share prices rose over the past three months. My screen returned 95 stocks when I ran it, no doubt reflecting the market's continued recovery, and included these recent winners:

Source: Motley Fool CAPS Screener; trailing performance from Sept. 18 to Dec. 14.

New York Community Bancorp, in fact, was picked as a stock that was ready to run in August. But while this screen might tell us which stocks we should have looked at three months ago, we'd rather find the stocks that we ought to be looking at today. I went back to the screener and looked for stocks that had just been bumped up to three stars or better, sport valuations lower than the market's average, and haven't appreciated by more than 10% in the past month.

Of the 60 stocks the screen returned, here are three that are still attractively priced and that some investors think are ready to run today:

Source: Motley Fool CAPS Screener; performance from Nov. 20 to Dec. 14.

You can run your own version of this screen; just remember that the data is dynamically updated in real time, so your results may vary. That said, let's examine why some investors might think these companies will go on to beat the market.

ITT Educational Services
One of the arguments in favor of for-profit schools like ITT Educational Services is that during the recession, people would head back to school to get the education and training to prepare themselves for the recovery. Left unsaid, however, was that many of these students hail from lower-income backgrounds, so it's more likely they'll be unable to repay their loans.

According to a Department of Education study, for-profit schools had a default rate on their loans about three times that of public and non-profit schools. While ITT Educational Services had only one campus with a default rate above 30%, Corinthian Colleges (NASDAQ:COCO) had 22 campuses whose default rate exceeded that, and one of them exceeded 40%.

CAPS All-Star member latinpicker thinks the concerns are overblown.

Company still growing at a very good rate. Valuation at historical minimum. I believe fears are overdone and [the stock offers] very good appreciation potential.

Principal Financial Group
Life insurer Principal Financial Group has earned accolades for avoiding much of the pain the rest of the industry has endured in this recession, and it even went out of its way to reject any taxpayer handouts. Still, it can't avoid the reality of the situation and has forecast that 2010 will likely bring subpar performance.

That hasn't dissuaded some investors. Of the more than 200 CAPS members who've rated Principal Financial Group, 81% believe it will outperform the market.

True Religion Apparel
CAPS member IraqScott writes that high-end jeans maker True Religion Apparel is peddling the wrong message in this recession.

They continue to expand the footprint and spend more capital on inventory for new stores, etc. Fashions don't last long and no matter how great they fit, $200 a pair is all about fashion, not fit. When sales slide they will crash hard because of the build out of retail space and associated fixed costs. Also they decide to change sales providers (moving in-house) in the middle of the xmas season push? Very strange.

Three for free
Are these companies still a good value and ready to make their move? I'm heading over to CAPS to mark them to outperform the broader averages. If you agree, join me there, or let us know what you think in the comments section below.

It pays to start your own research on these stocks on Motley Fool CAPS. Read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made -- all from a stock's CAPS page. Head to the completely free CAPS service and let us hear what you have to say about these or any other stocks that you think are starting to rev their engines.