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

Since 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:


Market Cap

EPS Surprise

Avg. Analyst
5-Year EPS Est.

CAPS Rating
(out of 5)

DG FastChannel (Nasdaq: DGIT  )

$520 million

$0.32 vs. $0.23



Fortress Investment Group (NYSE: FIG  )

$1,060 million

$0.12 vs. $0.09



STEC (Nasdaq: STEC  )

$651 million

$0.09 vs. $0.00



Source: 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, since the CAPS community's helping us out, their favorite selections might be a good place to begin.

An alternative opportunity
Internet marketing and advertising provider DG FastChannel got walloped by its third-quarter earnings forecast, which pointed to seasonality issues and a shift in focus that's delaying expected growth.

FastChannel enables the electronic delivery of commercials, syndicated programs, and video news releases. It benefitted from the market's strong growth late last year, which masked normal seasonal slowdowns. It's coming up against those tougher comparisons, which makes it look like business is slowing, but the digital media service provider expects acquisitions to start contributing soon.

It's also facing stiffer competition from Ascent Media at the same time it's switching from a wholesale to full-service business model. That's contributed to the lower outlook the company gave, but the long-term growth prospects appear to remain intact.

The resulting sell-off in the stock has CAPS member Retracement looking at this as a buying opportunity:

I now have the possibility to purchase shares in a well-managed company outperforming the market for less than $16, which amounts to 0.9 times book and a P/E of 10. Management has recently provided Q3 and full year guidance. For Q3 [DG FastChannel] expects revenues of $51-53 million and EBITDA of $23-24 million. For the full year [DG FastChannel] expects revenues of approximately $230 to $234 million and EBITDA of approximately $105 to $107 million. It boils down to approximately 22% year-over-year revenue growth and approximately 36% EBITDA growth. Not to shabby and hopefully enough said!

I'll drink to that
STEC has had to fend off inroads made by rival Western Digital (NYSE: WDC  ) while at the same time surmounting inventory issues at EMC (NYSE: EMC  ) for its ZeusIOPS solid-state drive. But storage remains hot and CAPS member jrmart has said STEC believes the "enterprise SSD market is likely to approach $4 billion in revenues by 2015, nearly 17x times that of 2009, while unit shipments will increase by 50x during that period to over 4 million units."

If that's the case, by the time Western Digital or Seagate Technology (NYSE: STX  ) gets a drive on the market comparable to the ZeusIOPS, STEC will have already further secured its industry-leading position.

Man the ramparts
Hedge fund operator and private equity investor Fortress Investment Group has been fighting the perception that management doesn't have confidence in the stock after the CEO and several other insiders sold off a large tranche of stock. With hedge funds coming under increasing scrutiny and with the potential to regulate these firms more closely, it's likely Fortress, Blackstone, and other investment vehicles won't have such an easy go of it in future periods.

But if the low-hanging fruit has already been taken, it's not like all opportunities are gone. Fortress is acquiring American International Group's (NYSE: AIG  ) consumer credit division, a dicey move, it would seem, into subprime lending. But in segments of the market that are truly disliked, there can be excellent opportunities for profit. Fortress is getting an experienced subprime consumer lender with a target demographic that's expanded along with the recession.

Still, more than a quarter of the CAPS members rating Fortress see potential problems, indicating they think it will underperform the market. Of course, that means three-quarters believe it can turn out a market-beating effort. Don't hedge your bets, let us know on the Fortress Investment Group CAPS page whether the subprime market is still a prime target for growth.

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!

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 here. The Motley Fool has a disclosure policy.

Read/Post Comments (4) | Recommend This Article (4)

Comments from our Foolish Readers

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 19, 2010, at 3:06 AM, MashkiaTsair wrote:

    I disagree.

    Western Digital's management is very flexible, and they already have SSD disks, besides the HDDs aren't going anywhere. HDDs are here to stay.

    Western Digital (WDC) is an excellent company and is my top pick.


  • Report this Comment On September 20, 2010, at 12:10 PM, ravens9111 wrote:

    How do you play DGIT with the large number of class action law suits pending?

  • Report this Comment On September 20, 2010, at 4:44 PM, jrmart wrote:

    ENTERPRISE solid state drives offer a sophisticated combination of solid state memory and software. The ZEUS solid state drive from STEC fits into this category. There is another category that FOOLISH readers continue to mention. That category is VAPORWARE. Other competitors offer solid state storage devices for PCs, but when you go to their websites and look for enterprise solid state drives, you can only find WHITE PAPER references. Unfortunately in the enterprise solid state drive area, you can't sell a WHITE PAPER as a real product. Additionally, after you introduce a real product, it can take between 12 to 18 months to get it tested and approved for use in the enterprise storage area. In the meantime STEC has just delivered their 2nd generation solid state ZEUS drives to customers and has already sold over 200 million of their 1st generation drives to IBM, EMC, 3PAR, etc.. For more detailed info please go to the links below.

  • Report this Comment On September 21, 2010, at 12:14 PM, Darren223 wrote:

    These drive makers are being beaten down by the false perception that they're in a dying industry. Eventually the Buffet 'weighing machine' will overpower the negative 'voting machine' influence, the shorts will get squeezed, and stockholders should see some significant, and rapid, upswing. My guess is it will happen the next time these companies continue to report solid earnings & outlooks.

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