There are plenty of strategies for picking stock winners, from finding low P/E stocks to seeking companies selling at a discount to the present value of their future cash flows. At the small-cap investment 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. My screen returned just 74 stocks when I ran it, no doubt reflecting the market's turmoil during that time, and included these recent winners:


CAPS Rating 12/27/10

CAPS Rating 3/28/11


13-Week Performance

Higher One Holdings ** *** 27.6%
EasyLink Services International ** **** 25.3%
Ironwood Pharmaceuticals ** *** 21.3%

Source: Motley Fool CAPS screener; trailing performance from March 18 to June 17.

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 81 stocks the screen returned, here are three that are still attractively priced, but which investors think are ready to run today:


CAPS Rating 3/28/11

CAPS Rating 6/24/11


4-Week Performance

P/E Ratio

Dynex Capital (NYSE: DX) ** *** 0.8% 7.0
Pitney Bowes (NYSE: PBI) ** *** (6.9%) 15.3
Xilinx (Nasdaq: XLNX) ** *** (0.8%) 14.5

Source: Motley Fool CAPS screener; price return from May 17 to June 19.

You can run your own version of this screen over on CAPS; 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.

Dynex Capital
Particularly because of their yields, mortgage REITs like American Capital Agency (Nasdaq: AGNC) and Cypress Sharpridge Investments are popular with investors, in no small part because their portfolios are backed by the full faith and credit of the taxpayer. Their money is in Fannie Mae- and Freddie Mac-backed mortgages, so any defaults are picked up by the government.

But other mortgage REITs, like Dynex Capital and Chimera Investment (NYSE: CIM), which also sport some eye-popping yields, have the added risk of suffering losses if their mortgage investments default. Although much of the worst mortgage investments were done in by the subprime debacle, there are those who believe "pretend and extend" has only delayed a second housing implosion.

CAPS member amungiol is willing to accept the risk because of Dynex's mandated dividend:

Since Dynex Capital is a REIT it must distribute at least 90% of its taxable income to its shareholders. This is an IRS regulation and one sees it in the hefty $1.08 annual dividend per share.

Let us know on the Dynex Capital CAPS page whether chasing the yield here is worth the risk.

Pitney Bowes
It's not a REIT, but Pitney Bowes' dividend yields a pretty hefty 6.7%. While it has a solid mail metering business, no doubt concerns about U.S. Postal Service insolvency have shaken confidence in the company. The mails are a business that should have been privatized long ago, as FedEx and UPS (NYSE: UPS) have proved adept at delivering packages for a profit.

First-class mail usage has plummeted and Pitney is undergoing a strategic realignment. It began offering e-commerce and logistics services and now provides a complete end-to-end mailstream service for businesses.

The likelihood of Congress allowing the postal service to default is pretty small, and CAPS member FitzColinGeraldĀ looks for Pitney Bowes to continue posting solid earnings results:

Pitney Bowes offers mail processing solutions for businesses in the United States and abroad. It invented the concept of 'metered mail' in the 1920s. With its mail-stream equipment, the company consistently posts solid earnings and a high dividend yield.

Add Pitney Bowes to the Fool's free portfolio tracker and see if it's a good investment in the future.

Programmable logic device maker Xilinx was considered a prime short candidate because rival Altera (Nasdaq: ALTR) continued to chip away at its share. Where Xilinx was seeing sales fall and receivables and inventories soar, Altera was enjoying significant growth.

Altera's still on the move higher, but the latest quarter shows that Xilinx got sales back on track and receivables are under control. However, still worrisome is its inventory, which saw a 9% sequential jump and a doubling from last year's numbers. At just 14 times earnings, though, it looks to be a reasonably priced stock with, as CAPS member KapaluaDreamin notes, a pipeline into the burgeoning smartphone trend: "Leader in specialized processing chips. Fits into future small devices of which there are many (smart phones etc)"

Let us know on the Xilinx CAPS page whether it's shortsighted to short this stock.

Three for free
Are these companies still a good value and ready to make their move? I'm heading over to CAPS to mark them to outperform the broader averages. If you agree join me there, or let us know in the comments section below whether you think these or any other stocks are starting to rev their engines.

The Motley Fool owns shares of United Parcel Service, Chimera Investment, FedEx, and Higher One. Motley Fool newsletter services have recommended buying shares of FedEx. Motley Fool newsletter services have recommended shorting Xilinx. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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.