3 Stocks Set to Soar

There are plenty of strategies for picking stock winners, from finding low P/E stocks to seeking companies selling at a discount to their future cash flows. But what if we could whittle down our list of prospects beforehand, to find those whose engines are just getting warmed up?

Using our investor intelligence database at Motley Fool CAPS, I screened for stocks that were marked up by investors before their share prices rose over the past three months. My screen returned just 49 stocks when I ran it, no doubt reflecting the market's turmoil during that time, and included these recent winners:

Stock

CAPS Rating March 7, 2012

CAPS Rating July 6, 2012

Trailing-13-Week Performance

Exterran Holdings ** *** 49.2%
Quiksilver ** *** 42.2%
Keryx Biopharmaceuticals ** *** 41.2%

Source: Motley Fool CAPS Screener; trailing performance from June 1 to Aug. 31.


While this screen might tell us which stocks we should have looked at three months ago, we'd rather find the stocks that we ought to be looking at today. I went back to the screener and looked for stocks that were just bumped up to three stars or better, sport valuations lower than the market's average, and haven't appreciated by more than 10% in the past month.

Of the 45 stocks the screen returned, here are three that are still attractively priced, but which investors think are ready to run today:

Stock

CAPS Rating July 5, 2012

CAPS Rating Oct. 5, 2012

Trailing-4-Week Performance

P/E Ratio

Rent-A-Center (Nasdaq: RCII  ) ** *** (0.7%) 12.0
Smith & Wesson Holding (Nasdaq: SWHC  ) ** *** 1.5% 15.5
Stamps.com (Nasdaq: STMP  ) ** *** (1.5%) 9.2

Source: Motley Fool CAPS Screener; trailing performance from Aug. 3 to Aug. 31.


You can run your own version of this screen over on CAPS; just remember that the data's dynamically updated in real time, so your results may vary. That said, let's examine why investors might think these companies will go on to beat the market.

Rent-A-Center
Unemployment might have miraculously tumbled to 7.8% in an October surprise, but this was largely due to a surge in part-time jobs for economic reasons, meaning people can't find full-time work, the economy's still a mess, or demand is low -- or all of the above. Such conditions mean companies that cater to the unemployed or underemployed like Rent-A-Center and Aaron's ought to thrive. With their target demographic having annual incomes between $15,000 and $50,000 and generally lacking access to credit, there's a large market opportunity for the rent-to-own industry to grow.

Wall Street is certainly bullish on the prospects, as all 10 analysts weighing in on Rent-A-Center and tracked by CAPS think it will beat the market indexes, but you can tell me in the comments box below whether you think the economy's improving enough that the rent-to-own industry will ultimately see demand slacken.

Smith & Wesson Holding
It was pretty much those same economic conditions that had gun maker Smith & Wesson Holding setting its sights on higher earnings growth expectations. From the poor economy to fear of rising crime, from the need for security to a desire to beat potential new restrictive gun-control initiatives, FBI background checks for gun purchase permits are soaring to new highs and both S&W and Sturm, Ruger (NYSE: RGR  ) are seeing excess demand for their weaponry.

The CAPS community has cited all the above reasons in rating Smith & Wesson to beat Wall Street, but some analysts think maybe the gun trade has peaked. I'm not so sure, at least not near-term, so I've rated Smith & Wesson to outperform, but you can tell me below whether you think the gunslingers will continue shooting out the lights.

Stamps.com
Considering the Internet business model has proven especially resilient in trouncing the bricks-and-mortar version these days, I'll admit to a certain level of surprise that Stamps.com hasn't been more successful in taking away more business from the U.S. Postal Service. Maybe it's the ubiquity of the local post office or the government's own online initiatives, but though the e-stamp leader has seen certain aspects of its business grow (its core business-facing PC postage division revenues were up 18% last quarter), the overall trends haven't been as robust as you might imagine.

Pitney-Bowes (NYSE: PBI  ) is a tough competitor, though, and has much greater mindshare among the enterprise customer, so despite the growth Stamps.com is seeing, the increases remain tempered. With 92% of the 193 CAPS members rating the stamp maker picking it to beat the market indexes, it's clear they think the postal service's woes and ballooning deficits will benefit Stamps.com.

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Fool contributor Rich Duprey holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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