Achieving financial success doesn't require you to have the investing acumen of Warren Buffett or be a trust-fund baby to start securing your financial future.

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 with market values less than $3 billion, had earnings surprise of 15% or more last quarter, and are forecast to have long-term earnings growth potential of at least 15%. 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:


Market Cap

EPS Surprise

Avg. Analyst 5-Year
EPS Est.

CAPS Rating
(out of 5)

Cepheid (Nasdaq: CPHD)

$1.1 billion

($0.07) vs. ($0.12) est.



Lululemon Athletica (Nasdaq: LULU)

$2.9 billion

$0.40 vs. $0.29 est.



Pacific Bancorp (Nasdaq: PCBC)

$190 million

($0.43) vs. ($0.58) est.



Source:, company filing, and Motley Fool CAPS.

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 here, and we'll start with their favorites.

An alternative opportunity
Capital spending budgets at hospitals have been pressured during the recession, hurting the results of medical device maker Cepheid. It saw just a 4% increase in total product sales in 2009, contributing to a $22.5 million net loss. Yet the cutbacks seem to be easing as fourth-quarter results were markedly better, with sales up 34% from the year-ago period.

That's being borne out across the industry as a number of device makers have seen recent results much stronger than they have been. Orthopedic implant and surgical equipment maker Stryker (NYSE: SYK) saw business stabilize in the latest quarter while Intuitive Surgical (Nasdaq: ISRG) was able to place 87 net new additions of its pricey da Vinci systems in hospitals, albeit below what analysts were looking for.

Stryker is predicting a modest low- to mid-single digit increase in hospital capital spending for the coming year, which bodes well for Cepheid and other device makers. But CAPS All-Star zzlangerhans isn't convinced that such modest improvements warrant the higher valuations Cepheid is enjoying:

2009 revenues and profits were just about identical to 2008 revenues and profits. 2010 revenues are projected to increase by 15% and the company expects to break even, after losing 22M the last two years. Last winter's sell-off was clearly overdone, but does the current business justify a billion dollar cap? I'm not seeing it.

Basking in luxury
While nearly two-thirds of the CAPS members rating apparel maker Lululemon Athletica think it will outperform the market, just little more than half the All-Stars examining its prospects feel the same way. All-Star Griffin416, who's in the 99th percentile of CAPS members, says that compared to its earnings, Lulu's valuation is out of whack, while cibient appreciates the quarter it turned out, but notes, "this is a clothing mfr/retailer for crying out loud."

On the other hand, the strength of luxury brands has been evident in the earnings reports coming out, as Coach (NYSE: COH) recently showed. It magically generated a 37% increase in profits in the first quarter as it benefited from greater international acceptance of its goods, particularly in China.

Shop the Lululemon Athletica CAPS page for more insights into this retailer, and let us know if its growth prospects are as threadbare as the All-Stars are suggesting.

Going on the offensive
Investors are giving short shrift to concerns about housing or the commercial real estate market, bidding up shares of Pacific Capital Bancorp and others over the past few days. The banks themselves seem to dismiss concerns, too, as they've been lowering reserves for loan losses on their earnings statements. Pacific Capital cut loan loss reserves nearly in half from the year-ago period.

With 67% of the CAPS members rating Pacific Capital to outperform the market, it seems they're taking it to the bank that the worst of the crisis is behind the regionals, and they'll generate greater interest going forward.

Foolish final thought
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!

Stryker is a Motley Fool Inside Value recommendation. Intuitive Surgical is a Rule Breakers pick. Coach is a Stock Advisor selection. The Fool owns shares of Stryker.

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.