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 stock-picking 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. (The market as a whole climbed sharply, then traded sideways, during that same period.) My screen returned 144 stocks when I ran it, no doubt reflecting the market's continued recovery, and included these recent winners:

Source: Motley Fool CAPS Screener; trailing performance from July 17 to Oct. 12.

Vascular Solutions, in fact, was previously picked as a stock ready to run in May. But 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 41 stocks the screen returned, here are three that are still attractively priced, but which investors think are ready to run today:

Source: Motley Fool CAPS Screener; price return from Sept. 18 to Oct. 12.

You can run your own version of this screen; 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.

Digital River
Allowing one customer to compose too much of your revenue base will almost certainly cost you a sizeable chunk of your market cap if that customer decides to go elsewhere. Digital River found that out the hard way when Internet security specialist Symantec (NASDAQ:SYMC) decided to internally provide the e-commerce business it had previously outsourced. The ensuing sell-off slashed one-third off Digital River's share price.

Top-rated CAPS member TSIF points out that Digital River has been diversifying its customer base all along, and ought to recover from the loss eventually:

Many companies exist with a few "major customers" that can greatly impact their stock price if the customer leaves. Digital River has been diversifying its base and growing it's sales. I believe that by the time this impacts their bottom line in mid-2010 that Digital River will have made up ground in other areas. While not the full 24% from Symantec, more than the market is giving them credit for with a 38% price hit today.

Patterson Companies
Medical supply leader Patterson Companies services not only the dental industry, but also the fairly recession-resistant veterinary supply business. Even in lean times, people don't want to skimp on caring for their pets, which has helped the $7 billion animal health-care industry hold up better than most.

That could partly explain why 84% of the CAPS members rating Patterson Companies believe it will outperform the market. Almost 90% of the company's All-Star raters agree. The Healthcare Providers & Services sector of CAPS has risen more than 32% over the past year.

PHI
When you think about the oil and gas production industry, ferrying crews to and from offshore platforms doesn't typically cross your mind. I figured the oil companies simply did the job themselves. As it turns out, PHI has occupied that tidy little niche since 1949, growing into a leading helicopter operator in the Gulf of Mexico.

Although only a small number of CAPS members have rated the low-key transportation company, 85% of that group believe its shares will continue to gain altitude.

Three for free
It pays to start your own research on these stocks on Motley Fool CAPS. Read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made, all from a stock's CAPS page. Head over to our completely free CAPS service, and share your opinions about these or any other stocks that you think are starting to rev their engines.