Amass a Fortune With These Stocks

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

Small sums of money invested monthly in undervalued small-cap stocks offer hope for your greatest returns. They offer the best growth opportunities for growth because the big investors mostly ignore them.

I'm screening for stocks sporting less than $3 billion in market cap and offering earnings surprises of 15% or more in the previous quarter, with long-term earnings growth forecast to be at least 15%. I'll then filter my findings through the collective investing wisdom of the 180,000 members in our Motley Fool CAPS community.

Here are some of the stocks this simple screen found:

Company

Market Cap

EPS Actual vs. Estimated

Average Analyst 5-Year EPS Estimate

CAPS Rating (out of 5)

Echelon (Nasdaq: ELON  ) $196 million 133% 17% **
InterDigital (Nasdaq: IDCC  ) $1.9 billion 39% 15% ****
Pandora Media (NYSE: P  ) $1.7 billion 300% 40% *

Sources: 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.

A link to the future
Will petty parochial politics kill the Smart Grid? If the recent crumbling of a deal between smart-meter specialist Echelon and Duke Energy (NYSE: DUK  ) is any indication, the answer is a resounding yes. The utility short-circuited over opposition to deploying smart meters following revelations of a too-cozy relationship with regulators in Indiana. The setback, and subsequent denial of being allowed to recover millions in storm damage from last year, led Duke to cancel a $14.5 million order with Echelon for its meters.

It comes at an inopportune for the technology leader as Cisco (Nasdaq: CSCO  ) is pursuing an end-to-end IP smart-meter architecture with Itron. Yet Echelon was able to still record a surprise quarterly profit as sales jumped 62% from the year-ago period, a development that has the Fool's Sean Williams suspecting that it might make an attractive takeover candidate.

That would be an attractive outcome for the 89% of CAPS members rating the smart-meter specialist to outperform the market. Yet with international opportunities advancing in Brazil and China, Echelon may be able to climb to higher ranks on its own. Let us know in the comments section below or on the Echelon CAPS page what you think, and then add it to your watchlist to see whether regulators make the Smart Grid a dumb investment.

Smart thinking
Patents are a valuable weapon in a company's arsenal, but only until the next technological advancement comes along that renders yours obsolete. Or they need to be monetized in some fashion. That can form a rich basis for valuation, but it somehow needs to be manifested. So investors who pursue businesses based solely on their patent portfolios are likely to be disappointed if those developments don't materialize.

Just look at InterDigital and Eastman Kodak (NYSE: EK  ) as just two of the latest examples of patent-rich businesses that have developed big followings based on their IP portfolios but are currently in decline, as the portfolios haven't generated the returns that were expected.

It's not completely their fault, since analysts got swept up in the sudden rash of patent-buying that swept the market, but at least InterDigital had -- and continues to hold -- technology wins that are in the forefront of a growing market, the burgeoning wireless industry. Kodak, not so much.

The ever-expanding smartphone market attracts to InterDigital investors like CAPS member Lawrence56, as it's undeniable the specialist's patents are still valuable, and it's why the lion's share of the nearly 1,300 other community members weighing in on the patent holder think it will beat the market still. Add InterDigital to your watchlist and let us know in the comments section below whether you think the stock belongs in a balanced portfolio.

Rising fortunes
While a patent moat is a dicey proposition, no moat is even worse, and that's the problem facing online radio service Pandora Media, which faces a host of rivals -- everything from terrestrial competitors like Clear Channel and satellite programmer Sirius XM Radio (Nasdaq: SIRI  ) to iTunes, Rhapsody, and Spotify. It's not a drawbridge that limits entrants, but rather a four-lane superhighway.

So it may have been somewhat surprising that Pandora saw revenues and profits grow last quarter but didn't boost guidance to match. While the outlook was below what analysts had been expecting, it might reflect a maturing and conservative management not wanting to disappoint down the road. Of course, it could also represent reality that growth will only go so far with so many options open to listeners. Advertisers might not want to travel so far with Pandora, as CAPS member Brent2223 recently remarked: "Only a matter of time before advertisers realize that marketing to freeloaders may not be the most effective use of their money, marketing 101."

Add the music maker to the Fool's free portfolio tracker, and tell us on the Pandora Media CAPS page whether you think investors will continue to tune in to this stock.

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!

Fool contributor Rich Duprey owns shares of Cisco Systems, but he holds no other position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of and has created a bull call spread position on Cisco Systems. Motley Fool newsletter services have recommended buying shares of InterDigital and Cisco Systems. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.


Read/Post Comments (2) | 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 November 28, 2011, at 6:09 PM, bottomfisherman wrote:

    I guess that nosedive Pandora is taking as it approaches the end of the 6 month lockout period preventing insiders from dumping their stock was my indication that this thing is a winner. Look for Pandora at 5 dollars a share by year end, less then 2 dollars a share next earnings dissapointment.

  • Report this Comment On November 28, 2011, at 6:09 PM, Mega wrote:

    "Just look at InterDigital and Eastman Kodak (NYSE: EK ) as just two of the latest examples of patent-rich businesses that have developed big followings based on their IP portfolios but are currently in decline, as the portfolios haven't generated the returns that were expected."

    EK is more of an example of a business where shareholders desperately cling to any justification to hold, no matter how unrelated it is to their original reason for buying.

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