3 Stocks Ready to Roar

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. At the small-cap investment service Motley Fool Hidden Gems, even in this market, the analysts are able to stay ahead of the pack by finding undervalued stocks that Wall Street and investors have ignored.

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

Stock

CAPS Rating* 
10/1/10

CAPS Rating* 
1/3/11

Trailing 13-Week 
Performance

Crawford & Company

**

***

38.8%

Enterprise Financial Services

**

***

35.6%

First Financial Northwest

**

***

48.8%

Source: Motley Fool CAPS Screener; trailing performance from Dec. 31 to April 1. *Out of 5 stars.

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

Stock

CAPS Rating 1/3/11

CAPS Rating 4/1/11

Trailing 4-Week Performance

P/E Ratio

hhgregg
(NYSE: HGG  )

**

***

(8.7%)

12.4

Mercer International
(Nasdaq: MERC  )

**

***

(3.1%)

6.5

Sherwin-Williams
(NYSE: SHW  )

**

***

5.5%

20.3

Source: Motley Fool CAPS Screener; price return from March 4 to April 1.

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.

hhgregg
The Internet has killed retail, at least sellers of consumer electronics, or so the theory goes. This past Christmas many shoppers avoided not only industry giant Best Buy (NYSE: BBY  ) , but smaller outfits like hhgregg too. Radio Shack (NYSE: RSH  ) , already struggling with irrelevance, is hoping a focus on mobile computing will elevate it again.

CAPS member cruzn19 thinks it will be difficult for hhgregg and others to overcome the advantage e-tailers have, but JDM62 says in response that the "gotta have it now" mentality of many consumers will lead them to the retailer, particularly as the economy improves.

I understand completely what you're saying and would normally agree, but there's so many that just can't wait a day for something to be shipped to them, especially a new game. Also, [hhgregg shares] are down almost 36% since the beginning of this year, the economy is slowly improving but is going to really get moving soon, so this is a great buy now.

Put the consumer electronics specialist on your own watchlist and tune in on the hhgregg CAPS page and let us know if you think it will still short circuit.

Mercer International
As the financial crisis crushed print advertising, global wood pulp prices plummeted, putting pulp producers into a tailspin. However, over the past 18 months, those prices have recovered and as of the end of February were up 17% over the past year. While consumer goods makers like Kimberly Clark (NYSE: KMB  ) have been forced to raise prices in response, pulp producer Mercer International is in the midst of a growth spurt that's raising revenues and profits.

CAPS member RallyCry sees huge potential if Mercer is able to simply meet expectations, its stock should explode.

If 2012 earnings meet current analyst estimates of $3.18 per share, we are looking at a 2012 forward P/E of 4.28. The stock should easily be trading for a modest forward P/E of 8 at the beginning of next year. I'll set a price target of $21.60 and round the 2012 earnings number down to a more conservative estimate of $2.70 which is a 15% discount over current estimates. Barring a collapse in pulp prices we should see at least a 50% move up by the end of 2011.

Let us know on the Mercer International CAPS page whether it can go with the grain.

Sherwin-Williams
With housing still in a slump and having lost Wal-Mart (NYSE: WMT  ) as its biggest consumer customer, Sherwin-Williams would seem to be as much of an exciting investment as watching paint dry. Yet the maintenance and remodeling business continues to provide a good foundation and the global coatings business remains robust. One headwind everyone is facing is higher commodities costs, and Sherwin's titanium dioxide costs eat up over 20% of its total raw materials basket.

With 90% of CAPS members rating the paint specialist believing it will outperform the broad market averages, it seems Sherwin-Williams has everything covered. Brush up on its prospects on the Sherwin-Williams CAPS page then add it to the Fool's free portfolio tracker and watch as it paints its profits black.

Three for free
Are these companies still a good value and ready to make their move? I'm heading over to CAPS to mark them to outperform the broader averages. If you agree join me there, or let us know in the comments section below whether you think these or any other stocks are starting to rev their engines.

Best Buy and Wal-Mart are Motley Fool Inside Value picks. Best Buy, hhgregg, and Sherwin-Williams are Motley Fool Stock Advisor choices. Wal-Mart is a Motley Fool Global Gains selection. Kimberly Clark and Wal-Mart are Motley Fool Income Investor selections. Motley Fool Options has recommended a diagonal call position on Wal-Mart. The Fool owns shares of Best Buy, RadioShack, and Wal-Mart. Try any of our Foolish newsletter services free for 30 days.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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.


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