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 108 stocks when I ran it, no doubt reflecting the market's turmoil during that time, and included these recent winners:

Source: Motley Fool CAPS Screener; trailing performance from Aug. 24 to Nov. 23.

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 that investors think are ready to run today:

Source: Motley Fool CAPS Screener; trailing performance from Oct. 26 to Nov. 23.

You can run your own version of this screen over on CAPS; just remember that the data is 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.

American International Group
As wards of the state, insurance giant American International Group has performed better for taxpayers, turning a profit for the government after its financial rescue in 2008 and 2009 and allowing it to reduce its position to only owning about a fifth of the company. That's been a better result than the bailout of General Motors (GM -0.07%), which has lost money for taxpayers.

AIG believes it can continue to turn a profit by offering life insurance in the world's second largest economy, China, and to do so, it will establish a joint venture with Chinese insurer PICC Group. In addition, it will invest around $500 million in PICC's upcoming IPO in Hong Kong, bringing AIG full circle, as it was founded in Shanghai in the early part of the last century.

Wall Street is certainly bullish on the insurer's prospects as 19 of the 21 analysts weighing in on AIG 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 insurer's orient express will give it a new avenue of profit.

Valley National Bank
I don't expect Valley National Bank to bring down the financial markets again (we can leave that to the AIGs of the world), but its move to an "originate and sell" model that helped it improve its third-quarter balance sheet is generally a dangerous model for the market as a whole. It allows Valley National (and other banks that follow the model) to originate mortgages without regard for the ability of the borrower to repay, and sell those mortgages in a secondary market simply because there is a demand for securitization. Studies have found the system creates moral hazards and wide discrepancies in performance of those assets, suggesting the banks are releasing loans of lower quality into the market.

But the immediate result for Valley is that its non-performing loan base continued to improve, and with a dividend currently yielding 6.8%, it remains an investor favorite. I'm rating Valley National Bank to outperform, but you can tell me below if you think the bank will continue using the system to its benefit.

Warner Chilcott
Drug maker Warner Chilcott didn't have to resort to dicey financial maneuvers to beat analyst expectations this quarter, but looming generic competition does add an element of risk to its future prospects, if not its dividend.

Third-quarter revenues fell 7% as generics ate into sales of its top osteoporosis drug Actonel, which it acquired from Procter & Gamble (PG 0.32%) a few years ago, while generics from Mylan (MYL) and Impax Laboratories (IPXL) also ate into dermatological treatment Doryx. That's forced Warner to rely upon cost-cutting initiatives to bolster its finances, and while successful, provides a bright line limit on how far it can proceed in that direction.

Let me know in the comments section if you think Warner Chilcott can come up with new drugs to fend off the rising tide of generic competition.