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Achieving financial success doesn't require you to have the investing acumen of Warren Buffett or the starting bankroll of a trust fund baby.

Since the stock market is our best hope for realizing our dreams, start investing today by putting away small sums of money every month. Then seek out undervalued small-cap stocks for your greatest returns. I like these because they offer opportunities for growth, while still being mostly overlooked by the big investors.

To find these future giants, we'll screen for stocks with a market value less than $3 billion, an earnings surprise of 15% or more last quarter, and a long-term earnings forecast of at least 15% growth potential. We'll filter our findings through the collective investing wisdom of the 165,000 members in our Motley Fool CAPS community. If the best and brightest CAPS players think these stocks hold potential, then we ought to take notice, too.

Here are some stocks this simple screen found:


Market Cap

EPS Surprise

Avg. Analyst 5-Year EPS Est.

CAPS Rating
(out of 5)

Arena Resources (NYSE: ARD  )

$1.2 billion

$0.46 vs. $0.36



lululemon athletica (Nasdaq: LULU  )

$2.8 billion

$0.40 vs. $0.29



STEC (Nasdaq: STEC  )

$619.0 million

($0.08) vs. ($0.13)



Source: and Motley Fool CAPS.
EPS = earnings per share.

Of course, this is not a list of stocks to buy. This is a starting point for more research. We need to look more closely at these companies to see if analysts' faith in them is well-founded, but we've got the CAPS community helping us here, and their favorites would be a good place to begin.

An alternative opportunity
It's understandable why SandRidge Energy (NYSE: SD  ) would make a play for Arena Resources. Revenues for the oil and natural gas exploration company more than doubled in the latest quarter, with estimate-beating profits rising on the strength of more production and higher energy prices.

There seems to be a wave of consolidation under way in the sector, with Apache (NYSE: APA  ) buying Mariner Energy, and ConocoPhillips and Royal Dutch Shell entering into separate deals. Of course, ExxonMobil led it off last December when it announced its intention to buy XTO Energy.

Apache, though, might have wished it waited awhile longer to consummate its buyout agreement, since Mariner was such a big player in deepwater drilling in the Gulf of Mexico. But any of these deals could run into snags like that.

CAPS member NHWeston thinks SandRidge is too weighed down with debt and wonders if some other suitor might outbid it for Arena:

Sandridge is about to pay a 17% premium for Arena - with what I'm not sure, given Sandridge's level of debt. Nonetheless, a number of other "Big Nat Gas" players are reportedly getting impatient with NatGas's loooooooooooong awaited take-off, and the move by [Sandridge] might trigger other NatGassers to pad their bets with purchases of other small oil or drill companies. There might even be a "White Knight" willing to outbid Sandridge for the honor of Arena's hand.

Taken for a loop
What's hard to imagine is that yoga would inspire a winning investment, but with shares of Canada-based lululemon athletica having tripled over the past year, it has done better than many other retail apparel stocks. G-III Apparel has quadrupled in that time frame, but Nike and Under Armour (NYSE: UA  ) are up only around 35% each.

CAPS member Look4Dough foresees lululemon doing for sportswear what Starbucks did for coffee, though perhaps without a storefront on every corner:

Great niche player in the booming yoga market. Benefiting from little brand recognition in the US (and pretty much outside Canada), but this is changing as the company's top executive was a Starbucks executive during the growth years of SBUX. Plus, the mandate for LULU is to grow in the US market, and potentially globally. Hence, the company is poised for a huge growth.

In the eye of the beholder
Solid-state drives are aiming to supplant hard drives as the primary storage device in the very near future, with some analysts suggesting enterprise-level sales might almost double between now and 2015. CAPS member BillWaite3000 says STEC, as the industry leader, should capture the lion's share of the market, but notes that some see a possible lull in growth before it really catches on:

Pros: Solid P/E (10-11 based on last 4 quarters). They appear to be well-positioned in a market niche that appears to be poised for growth (SSDs for enterprise storage). Right now, they seem to have superior technology and are the standard SSD supplier for a few manufacturers.

Cons: One analyst estimates that the SSD market will be flat for a while and won't experience significant growth until 2012 and there's no guarantee they will continue to have the best technology through 2012.

Foolish final thoughts
Stock investing is not brain surgery. Finding good, undervalued companies is not as difficult as the professionals want you to think. You just have to commit to starting now, and do so regularly. Now's the time to begin!

Under Armour is a 
Motley Fool Rule Breakers pick. Starbucks is a Motley Fool Stock Advisor choice. Under Armour is a Motley Fool Hidden Gems recommendation. The Fool owns shares of Under Armour and XTO Energy. Try any of our Foolish newsletter services 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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