Amass Your Fortune With These Top Stocks

You don't need the investing acumen of Warren Buffett or the riches of a trust fund baby to achieve financial success.

Because the stock market is your best hope for realizing your 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 stocks 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 market values less than $3 billion, an earnings surprise of 15% or more in the previous quarter, and forecasts for long-term earnings growth potential of at least 15%. We'll filter our findings through the collective investing wisdom of the 170,000 members in our Motley Fool CAPS community. If the best and brightest CAPS players think these stocks hold potential, we ought to take notice, too.

Here are some of the stocks this simple screen found:

Company

Market Cap

EPS Surprise

Average Analyst 5-Year EPS Estimate

CAPS Rating (out of 5)

Accuray (Nasdaq: ARAY  )

$352 million

$0.08 vs. $0.05

28%

*****

Cypress Bioscience (Nasdaq: CYPB  )

$130 million

($0.05) vs. ($0.11)

20%

***

Echelon (Nasdaq: ELON  )

$329 million

($0.17) vs. ($0.24)

20%

***

Source: Yahoo.com and Motley Fool CAPS.

Of course, this is not a list of stocks to buy -- just a starting point for more research. We need to look more closely at these companies to see whether analysts' faith in them is well-founded. Still, because the CAPS community's helping us out, its favorite selections might be a good place to begin.

An alternative opportunity
Although Accuray competes directly against Varian Medical (NYSE: VAR  ) and TomoTherapy in trying to win the hearts, minds, and scalpels of doctors and hospitals, Intuitive Surgical (Nasdaq: ISRG  ) is the most familiar competitor, probably because the two offer unique, specialized systems that also happen to be quite expensive and thus sensitive to capital spending cuts.

Accuray's forecast for revenues in 2011 came in below analyst expectations because of the end of deferred revenues recognized under prior contracts, affecting the share price. The stock is down more than 10% over the past month and almost 20% this year.

Cypress Bioscience shares are off 40% this year. However, a deal with Marina Biotech allowing it to acquire Marina's patent rights and technology for carbetocin, a treatment for autism, ought to help bolster Cypress's pipeline of drugs for the central nervous system.

Right now, Savella, a treatment for fibromyalgia, is the only drug Cypress has on the market; it receives royalties from Forest Labs (NYSE: FRX  ) . Savella accounts for 98% of revenues. There's obviously a risk with a one-trick pony like this, but Cypress is actively pursuing growth through acquisitions, so there could be several more sources of revenue coming soon.

A good gauge
Smart grid upgrades are turning into some pretty dumb investments. We were supposed to be wowed by the new technology that would let us monitor our energy usage; it turns out it has the same lasting impact as cotton candy on the tongue. It's pretty cool at first, but in the end we just want lower energy bills, and when regulators are loathe to allow rates to rise during peak periods, the whole system breaks down.

For example, Duke Energy (NYSE: DUK  ) was going to roll out 800,000 meters to customers in Indiana, only to scale it back drastically because regulators didn't see enough of a benefit to distribute all of the meters. Even so, Duke Energy has extended its contract with Echelon, a smart grid specialist, to use its open, application-ready platform for deployment of intelligent devices. On CAPS, 92% of the members rating Echelon pick it to outperform the broad market averages.

Foolish final thoughts
Investing in stocks 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.

Intuitive Surgical is a Motley Fool Rule Breakers pick and Duke Energy is a Motley Fool Income Investor recommendation. Try any of our Foolish newsletter services free for 30 days.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

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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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 11, 2010, at 4:52 PM, PauvrePapillon wrote:

    Revenue recognition rules have contributed to a significant degree of confusion concerning Accuray’s reported growth in revenues and, hence, created a buying opportunity over the next few weeks.

    From CFO Derek Bertucci:

    “Prior to fiscal 2006, we sold CyberKnife systems in the US with Platinum service agreements, which entitled customers to specified upgrades over the term of their Platinum service agreements. All revenue and cost of sales were deferred when such systems were sold.

    “In fiscal 2009, we recognized $60 million of revenue for systems sold with Platinum service agreements. And in fiscal 2010, we recognized approximately $29 million of Platinum revenue. With only a small portion of this deferred revenue remaining, we expect to recognize approximately $5 million of revenue for systems still covered by Platinum service agreements in fiscal 2011, which will fully complete all Platinum revenue recognition.”

    Excluding such deferred revenues, Accuray is growing; last quarter’s revenues were up nearly 21 percent over the fourth quarter of fiscal 2009. However, in order to “replace” the Platinum deferred revenues in fiscal 2011, Accuray needs to sell and install about six or seven more systems than in fiscal 2010. They are projected to do that; however, owing to the additional systems that need to be installed in order to “break even” with 2010 revenue-wise, Accuray issued a conservative revenue guidance projection for 2011 – essentially flat with 2010. Further, they announced that installs for Q1 fiscal 2011 would be slow (again depressing recognized revenues) but then would pick up substantially particularly in quarters 3 and 4.

    The positives are that the company is profitable with the installed base as well as orders and backlog all increasing. The book-to-bill ratio is 1.5 and clinical demand for their product (as measured by CyberKnife treatments) increased 15 percent over the past year. As the CMS code bureaucracy catches up to the reality of CyberKnife technology (neurosurgeons have a billing code for radiosurgery – thoracic surgeons and urologists currently do not), Accuray shareholders expect even greater increases in CyberKnife utilization.

    The conservative guidance and warning on Q1 revenues have depressed the stock price and created a buying opportunity for ARAY shares which can be reasonably expected to see significant price appreciate as revenues increase substantially in the latter half of Accuray’s fiscal 2011 (the first half of calendar 2011).

    So if you were looking at Accuray’s unique life-saving technology as a possible long-term multi-bagger, the next few weeks or so may be a good time to jump in.

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