The Next 5 Stocks to Buy?

It's not easy to gain acceptance for your products and services when you're servicing the world of the subprime market. Instead of being hailed as an innovator bringing credit and financial transactions to individuals who would otherwise be closed out, such companies are often shunned as pariahs and outcasts. Add in regulators, politicians seeking votes, and social activists vilifying your every move, and you end up being stigmatized.

Such is the environment Motley Fool Hidden Gems Pay Dirt recommendation World Acceptance (NASDAQ:WRLD) operates in. Primarily a payday lender, World Acceptance also offers a variety of financial services that you and I take for granted, but which the unbanked have little opportunity to access. It sells insurance to mitigate risk of borrowers' loss, markets auto-club memberships, sells financed electronics and appliances, and offers tax-prep services.

Payday lenders are under assault in this country. Little discussion is given to the heightened risks such lenders face because of the slender ties a borrower may have to the traditional banking system. Thus, you'll find higher rates and fees, which, if annualized, would seem usury.

It's true that a $15 fee for a $100 loan means you'll pay hundreds in fees if you keep rolling it over. But trying to translate those fees to an annual percentage rate (APR) is misleading. When banks charge $3.50 or more to get money out of an ATM, you may not realize that you could easily pay $175 or more in fees every year just by using a cash machine once a week. And when a bank charges $29 for bouncing a $10 check, you don't typically see it referred to as charging 290% interest for a one-day "loan." The same holds for late fees on credit cards. All financial institutions make huge amounts of money on fee income -- not just payday lenders.

Yet payday lenders, like industry leader Advance America (NYSE:AEA), are feeling the heat, and others serving the subprime market, like CompuCredit (NASDAQ:CCRT), find themselves getting mugged as well.

Screening for likeability
World Acceptance, however, showed up on a screen of companies that have enjoyed growing investor support these days after starting off the year on the outs. The company jumped from a two-star Motley Fool CAPS rating (out of five) in January to four stars today while also enjoying a valuation below that of the market.

CAPS is a 110,000-member investor community that rates thousands of stocks on whether they will outperform or underperform the market. Although it's not a predictive service, in its first year of operation, the trailing returns of the stocks in the CAPS universe correlated precisely with their relative CAPS ranking. Top-rated four- and five- star stocks outperformed low-rated one- and two-star stocks.

Here are a few of the other companies the CAPS screener found that are currently enjoying significant investor support:

 Sources: Motley Fool CAPS, Morningstar. *For next fiscal year.

Naturally, this is not a list of stocks to buy and sell, but rather a starting point for further analysis. Investors have raised their outlook significantly on these companies, and it may mean there is still room to move.

A fine-mesh filter
World Acceptance and other payday lenders ought to benefit from the current economic climate. It's no surprise that when the economy sours, people at the lower end of the FICO score range to have greater need for its services. For that reason, CAPS investor rynojay thinks it's a good time to invest in World Acceptance: "Great business for current market conditions. High interest loans to those who can't get credit from other institutions."

Similarly, CAPS investor jgseattle finds the current valuation attractive, particularly if you think the worst of the credit crisis is over:

This is a good long term stock with growth [potential] as it expands across the US. To date it has avoided the credit issues facing a lot of financial. Reported good [earnings] with growth of mid teens, and revenues growth in high teens. Cash flow is very very good at $7/share. Seems to have a solid management. If you believe the credit issues are over, then this should be a good position [similar] to [Resource Capital, which] I recommended and closed.

Take a CAPS bow
There are many ways to screen for stocks to beat the market. You can use the new CAPS screener to find other stocks you're gonna want to own, but if you want to see what other stocks CAPS investors are marking up to four and five stars, head over to Motley Fool CAPS now -- it's completely free to join.