3 Stocks Set to Soar

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 were marked up by investors before their share prices rose over the past three months. My screen returned just 49 stocks when I ran it, no doubt reflecting the market's turmoil during that time, and included these recent winners:

Source: Motley Fool CAPS Screener; trailing performance from Feb. 17 to May 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 36 stocks the screen returned, here are three that are still attractively priced, but that investors think are ready to run today:

Source: Motley Fool CAPS Screener; price return from April 20 to May 17.

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.

Dollar General
Deep discount dollar store Dollar General seems to think the well of deep value customers has been tapped -- if not dry, then about as much as it can, and it's now looking up-market for new customers. According to Investors Business Daily, the "trade-down customer," or those making an average of $75,000 annually and looking to the dollar stores for consumables, are Dollar General's latest target, and the segment has become its fastest-growing category.

Having been big beneficiaries of the recession, Motley Fool writer Lee Samaha says the General, Dollar Tree (Nasdaq: DLTR), and Family Dollar have seen their stocks priced accordingly and are no longer as cheap as they once were.

With a new target audience, though, there may be more growth potential than is first apparent at Dollar General. CAPS member calicofatcat says their new store strategy gives them a leg up on the competition, which might be why almost 90% of those rating the deep discounter believe it will outperform the market indexes. Add the General's stock to the Fool's free portfolio tracker to see if it will be discounted even more.

Pitney Bowes
With the U.S. Postal Service hemorrhaging red ink and doubts about its solvency still palpable, it's no surprise mail-metering specialist Pitney Bowes got crushed by its earnings results the other day. It counts the post office as its biggest customer and with digital communication supplanting the need to lick 'em and stick 'em, traditional mail service is likely to go the way of the typewriter.

Yet therein lies the value proposition for Pitney Bowes, which is focusing more of its investments into digital solutions. One example is it partnering with Facebook for geocoding technology to enhance messaging capabilities (though with Facebook regularly under assault for privacy violations, it could be argued allowing such precision as geocoding provides is not a welcome advance).

While its legacy services do seem akin to the buggy whip these days, CAPS member gimponthego believes Pitney Bowes dividend -- currently yielding more than 11% -- will be worth the wait for recovery. At less than seven times earnings and trading at half its sales, it does seem somewhat inexpensive, but let us know on the Pitney Bowes CAPS page if you expect the market to give it a stamp of approval again.

WellCare Health Plans
Having lost its Medicaid contract with the state of Ohio -- as did Amerigroup, Centene, and Molina Healthcare -- in favor of Aetna and UnitedHealth Group (NYSE: UNH), the strong earnings report WellCare Health Plans put out was overshadowed by the news. WellCare even raised its earnings guidance for the year, but still the stock has fallen.

The market may be misreading this one and unfairly lumping everyone together. Where Molina generated 22% of its revenues from the Ohio contract, only 4% of WellCare's revenues came from the state. Even having lost Missouri as well, that's only another 1% of total revenues. While it would be better to gain states instead of losing them, this might be yet another indication that the efficient markets theory might not be all it's cracked up to be.

Tell us on the WellCare Health Plans CAPS page, or in the comments section below, if you think this is a case of throwing the baby out with the bathwater.

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, then check out this free report on dividend-paying stocks whose engines are all revved up. You can read it for free, but hurry, because it won't be around for long.