Build Your Fortune With These Winners

You don't have to have the investing acumen of Warren Buffett or be a trust fund baby to start securing your financial future with investing success.

Since the stock market is our best hope for realizing our dreams, start investing today by putting away small sums of money every month. Then seek out undervalued small-cap stocks for your greatest returns. I like these because they offer opportunities for growth, while still being mostly overlooked by the big investors.

To find these future giants, we'll screen for stocks that have market values less than $3 billion, that had earnings surprises of 20% or more last quarter, and that are forecast to have long-term earnings growth potential of at least 20%. We'll filter our findings through the collective investing wisdom of the 160,000 members in our Motley Fool CAPS community. If the best and brightest CAPS players think these stocks hold potential, then we ought to take notice, too.

Here are some of the stocks this simple screen found:

Source: Yahoo.com and Motley Fool CAPS.
NC = not calculable; VITA broke even vs. ($0.01) est.

Of course, this is not a list of stocks to buy. This is a starting point for more research. We need to look more closely at these companies to see if analysts' faith in them is well-founded, but we've got the CAPS community helping us, and starting with their favorites would be a good idea.

An alternative opportunity
When sound specialist Dolby Labs (NYSE: DLB) broke free from being just part of your stereo system, its technology ended up being a key component in theater sound systems and DVD players. It became an integral part of our television experience, digital cinema, mobile communications, and, through a partnership with Electronic Arts (Nasdaq: ERTS), even gaming.

I think we're seeing video software maker DivX at a similar inflection point that will take the stock much higher. Like Dolby at the start, its codecs were of humble beginnings, primarily a function of DVDs. But as the most recent quarter showed, its technology is going to be more widely distributed and DivX will become an important component of Internet video distribution. Sony's also allowing its video software to work with its new high-end Bravia line TVs and Samsung's Wave is the first mobile phone to get DivX certification for playing back 720p high-definition content. 

However, while CAPS All-Star tenmiles appreciates the mountains of cash the company has, this member believes the stock valuation has gotten ahead of itself. CAPS member mediaz, on the other hand, sees DivX as a long-term play and industry leader:

Solid video codec solutions with strong market recognition and penetration. Will be one of the leaders of the Internet media evolution to mobile and TV devices.

Clear the decks
There's a similar dichotomy of opinion on automated vacuum cleaner maker iRobot. Both grifs9473 and TMFDitty are frustrated by a lack of new development on a successor to the Roomba, but TMFDitty likes the torrid growth on the government contract side and believes the stock's valuation marks it as undervalued:

I've real concern about iRobot's seeming inability to move beyond Roombas/Scoobas on the home front. That said, its military division is going gangbusters, inventory and cash flow issues are all behind it, and the price-to-free cash flow ratio looks too good to resist. I've pegged this one as 50% undervalued -- if it can deliver the growth rate it's supposed to.

Patch it up
In home repair, once you fix the underlying problem, the remaining cracks can be covered up with a little bit of plaster. So you have to like a company like Orthovita, which makes a product that does for your bones what joint compound does for your home's walls.

When smoothed over bones, particularly fractured vertebrae or bones pocked by osteoporosis, the Plexiglas-like Cortoss creates a hard shell that fills in and supports the bone. CAPS member greedwhenfearful likens it to "bone spackle" and looks for tremendous growth opportunities in the years ahead:

A small cap 285 million health care play with a great product, Cortoss (aka bone spackle), that just received FDA approval. VITA should turn profitable for the first time in a decade. Trades for about 1 times sales. Under wall street's Radar with only 6 analysts covering.

The risk here is that this is a very competitive market, ranging from other small caps like Osteotech, which promotes several bone grafting technologies, to larger rivals like Integra Life Sciences (Nasdaq: IART) and even Johnson & Johnson (NYSE: JNJ). Some of these competitors are obviously better funded, but that also means they might find Orthovita would make a nice addition to their portfolio.

Foolish final thoughts
Stock investing is not brain surgery. Finding good, undervalued companies is not as difficult as the professionals want you to think. You just have to commit to starting now, and do so regularly. Now's the time to begin!