The Next 5 Stocks to Buy?

New York energy services provider Energy East (NYSE:EAS) could have the wind at its back, if the state's regulatory czars could see past their myopia and permit Spain's Iberdrola to operate wind farms following a proposed merger of the two. Yet the waters look as calm as the Atlantic during the summer doldrums; an administrative law judge has looked askance at the deal, and the state Public Service Commission has given only faint hope of approval.

Energy East owns two electricity distribution facilities in the state, as well as having distribution interests throughout New England. New York has long forbidden power companies from being vertically integrated -- that is, generating electricity and distributing it as well. Although the proposal has received approval from the federal government, as well as the other states affected by the merger, New York regulators have been trying to squash the move.

Other power companies like AES (NYSE:AES) and FPL Group (NYSE:FPL) own and operate wind energy subsidiaries, though not in New York.

The deal could ultimately prove beneficial to the state, since Iberdrola -- a utility giant in its own right in Europe, as well as a leader in building wind turbine farms -- has committed to investing $2 billion in wind farms in the state. Since wind is one of a handful of potential solutions to high energy costs, New York could be a leader, if only the commissars would put on their bifocals.

Screening for likeability
Energy East showed up on a screen of companies that have enjoyed growing investor support these days after starting off the year on the outs. Energy East jumped from a two-star Motley Fool CAPS rating at the start of the year to a three-star rating today, while also enjoying a valuation below that of the market.

CAPS is a 110,000-plus-member investor community that rates thousands of stocks on whether they will outperform or underperform the market. While not a predictive service, our research has found the returns of stocks in the CAPS universe correlated precisely with their relative CAPS ranking. Top-rated three-, 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:

Source: 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 this may mean there is still room to move.

A fine mesh filter
There's a bit of risk factored into Energy East's share price regarding the merger prospects.The Public Service Commission has softened its stance a bit, saying that if the merger was approved, each wind farm Iberdrola wanted to build should be reviewed on a case-by-case basis. However, as much as Iberdrola may want to move ahead with the acquisition, it's doubtful it wants to undergo the equivalent of the Spanish Inquisition on each project it wants to undertake. In fact, it has said that if limitations are imposed, then it doesn't want the utility.

CAPS member TLStockPicks recognizes this risk and suggests that "playing the arbitrage angle" may be a way to get into the merger:

Playing the arbitrage angle. I made this call as [Energy East] basically dropped to pre-buyout price levels on news that an administrative judge (with no authority) issued a ruling against Iberdrola SA's bid for $28.50/share.... If I were going into this for real money, I'd try to understand the growth prospects of [Energy East] a little bit more so I could more accurately estimate the downside of this arbitrage play by understanding the underlying company better (one thing other than the decent pricing I alluded to that I like about [Energy East] is a solid 5% dividend, though I'm not sure it's sustainable). With limited downside and what I think is a more-likely than-not chance of this deal getting past the NY PSC .... I will ride this until the PSC decision is made.

Takes 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 going to 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.