3 Winners to Watch and 1 to Buy Now

What companies are tomorrow’s big winners? In our ongoing series, I’m chatting with Fool analysts and advisors to discover the stocks they’re watching and the catalysts that would signal it’s time to buy.

Today, Fool analyst Rex Moore shares three companies that popped up on his screens and one that he recently elevated to his portfolio from his watchlist. (For your convenience, you can now create your own version at MyWatchlist.com, your free customized hub to follow the performance and Fool coverage of the companies you care about.)

Back in the early days of The Motley Fool -- all the way back to when co-founder Tom Gardner still had hair -- David Gardner developed the Foolish 8, a screen to find small-cap stocks growing at a rapid clip (you can find the eight criteria here). That portfolio earned a handsome 13% annualized return since 1998, far outdistancing the S&P 500’s 1.6% annualized gain. Rex altered the screen several years ago in order to add some elements of valuation and management effectiveness. The tweaks were good. The Modified Foolish 8 has brought in a 22% annual growth rate since 1998. With those results, it only makes sense to keep going to the well.

When he ran the Foolish 8 most recently when scouting purchases for his screening-based portfolio, he found a handful of stocks that are on fire. IT service provider iGate (Nasdaq: IGTE  ) has been a monster, more than doubling since January. Shares plummeted 20% recently on news that the company would pursue a majority stake in the considerably larger Patni Computers (NYSE: PTI  ) of India, but then clawed back after the Wall Street Journal reported that a consortium bid between iGate and private equity firm Apax Partners is the favorite to acquire this new revenue stream. Overall, the company is small but it’s clearly itching to grow.

Even after a recent tumble of roughly 18% in the wake of a secondary stock offering, Puda Coal (AMEX: PUDA  ) has been generating a lot of heat, with shares rising dramatically over the past three months. The company, a double this year, is a pure play on Chinese coking coal demand, which shows no sign of abating. It also showed up on the Foolish 8, which is Rex’s first step toward finding great investment ideas.

Even hotter has been athletic apparel retailer lululemon athletica (Nasdaq: LULU  ) , a member of Rex’s Modified Foolish 8. Shares traded as much as 20% higher right after the company delivered yet another outstanding quarterly report as analysts yet again dramatically underestimated lululemon’s financial performance. Net revenue is up, same-store sales are up, earnings are way up, net margins expanded, and my wife’s visits to the store have nearly doubled as she consistently finds clothes that keep her comfortable on her long-distance runs. The stock now trades near the high end of its 52-week range, but underestimate the company’s potential at your peril.

This is when the real work starts for Rex. He now resorts to old-fashioned fundamental analysis and his go-to metrics to run all the candidates through a process of elimination. Specifically, among his small caps, he likes to see a company with a business model that is not easy to replicate. You can follow along to see which of these makes the jump from watchlist to portfolio at Rex’s Rising Star portfolio.

And one he bought
While he admittedly has an affinity for small caps, Rex chose to follow the tenet of Wharton professor Jeremy Siegel and pursue a corporate El Dorado for his first purchase, an established organization that can anchor a portfolio for decades. After examining an array of corporate stalwarts, he decided that Coca-Cola (NYSE: KO  ) best filled that need. “It’s a true set-and-forget stock,” says Rex. “You’re not waiting for a catalyst, you don’t have to watch for changes to its business model. Coke is Coke.”

Coke is probably not going to be cheap -- Jeremy Siegel wrote in The Future for Investors that we should be willing to pay 20 to 30 times earnings for the solidity and stability of El Dorados -- but there are times when shares are more appealing than others.

And that’s why it pays to watch. You can make smarter investing decisions with your own version of My Watchlist, new and free from the Fool. Click below to start following one of the stocks mentioned above:

Roger Friedman doesn't own shares of any companies mentioned, but they're all now on his watchlist. The Fool owns shares of Coca-Cola, which is a recommendation of Motley Fool Inside Value, Motley Fool Global Gains, and Motley Fool Income Investor. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. 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 December 14, 2010, at 2:23 PM, dstwhit wrote:

    Why Coke over Pepsi? Living legend TMF1000 likes Pepsi (though I don't think he has anything against Coke), so I'm trying to figure out what makes one better than the other.

    Thanks.

    dstw

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