There are plenty of strategies for picking stock winners, from finding low-P/E stocks to seeking companies selling at a discount to 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 investors marked up before their share prices rose over the past three months. My screen returned just 90 stocks when I ran it, no doubt reflecting the market's turmoil during that time, and included these recent winners:


CAPS Rating, 1/14/11 (out of 5)

CAPS Rating, 4/15/11

Trailing-13-Week Performance





State Bancorp




Ulta Salon




Source: Motley Fool CAPS Screener; trailing performance from April 15 to July 15.

This screen might tell us which stocks we should have looked at three months ago, but 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 56 stocks the screen returned, here are three that are still attractively priced but that investors think are ready to run today.


CAPS Rating 4/15/11

CAPS Rating 7/15/11

Trailing-4-Week Performance

P/E Ratio

AbitibiBowater (NYSE: ABH)










Two Harbors Investment (NYSE: TWO)





Source: Motley Fool CAPS Screener; price return from June 17 to July 15.

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.

Just because AbitibiBowater emerged from bankruptcy protection last December, that doesn't mean it will be able to paper over the difficult environment it's in. High fuel prices, elevated raw-materials costs, and a reduced though still significant debt load weighed on first-quarter results. But since then, the largest U.S. newsprint maker cut its total debt by about a third, and energy prices have eased, though they're still high.

With the consolidation under way in the industry -- Rock-Tenn bought Smurfit-Stone and International Paper (NYSE: IP) made a bid for Temple-Inland (NYSE: TIN) -- there may be hope for AbitibiBowater to get acquired. Temple-Inland, after all, adopted a poison-pill plan to thwart IP, and with Abitibi trading at just half its book value, it's even cheaper than Boise, which has also attracted investor attention as a potential takeover candidate.

CAPS member ajm101 figures that if noted value investors such as Fairfax Financial's Prem Watsa are finding value in AbitibiBowater, then that's reason enough to follow along.

Blindly following Chou and Watsa. I do like holding different sets of companies w/ different betas, then selling them when there is rotation into them. I suspect paper will be around no matter how good iPad quarterly numbers get. … Short interest spike is keeping me out of a RL position right now.

Let us know on the AbitibiBowater CAPS page whether you agree that this discounted company is worth the paper it's printed on.

Global communications company IDT has a small (about 13% of total revenues) shale oil division, Genie Energy, that is pursuing initiatives in Colorado and Israel. Sounding like Zion Oil & Gas (NYSE: ZN), which is drilling for oil in Israel based on biblical interpretations, Genie's Israel Energy Initiative hopes to tap some of the country's estimated 250 billion barrels of oil (to understand the potential, Saudi Arabia has 260 billion barrels of proven reserves).

IDT is planning on spinning off Genie Energy in a tax-free transaction that's expected to be completed later this year. A separate spinoff of its Innovative Communications Technologies business has been put on hold after it had second thoughts about giving it full control over enforcement of patents without any input from IDT.

Much of the investment opportunity many see in IDT is from the spinoffs. CAPS members such as rainofstocks and shunngai are looking to get a piece of whatever the communications giant ends up calving off. You can add IDT to the Fool's free portfolio tracker and see whether it can dial up growth through these maneuvers.

Two Harbors Investment
Will mortgage REIT Two Harbors Investment be worth the risk? Like Chimera Investment (NYSE: CIM), Two Harbors already adds a layer of risk by including paper not backed by the likes of Fannie Mae and Freddie Mac in its portfolio. Now, along with global money-management powerhouse BlackRock, it is seeking to issue bonds that have lower-grade AA ratings.

Following the financial crisis, securitization in AAA-rated bonds has pretty much dried up. Two Harbors and BlackRock think there's enough interest in slightly lower-grade bonds to do a brisk business with investors willing to take on a little more risk in their portfolios.

Right now, Two Harbors has unanimous support on both Wall Street and Main Street, but let us know on the Two Harbors Investment CAPS page whether you think this risky business is now worth your attention.

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 Chimera Investment and Rock-Tenn. Motley Fool newsletter services have recommended buying shares of BlackRock. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Rich Duprey has no financial position in any of the stocks mentioned in this article. You can see his holdings. The Motley Fool has a disclosure policy.