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. 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 52 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 June 1 to Aug. 31.

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

Source: Motley Fool CAPS screener; trailing performance from Aug. 3 to Aug. 31.

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.

Arrow Financial
Founded around the time James Fenimore Cooper wrote Last of the Mohicans, Arrow Financial is headquartered in the prime setting of the book, Glens Falls, N.Y., and it has proven itself to be every bit as sturdy as the lead character in that tale. Still, the policies of the Federal Reserve continue to harm it and similar regional banks. The artificial low-interest rate environment Ben Bernanke has imposed continues to weigh on the bank's ability to expand its net interest margins, and in the second quarter it once again suffered as margins narrowed from 3.35% last year to 3.26% this time around.

Yet its dividend continues to rise, and the quarterly dividend of $0.25 per share was 3% higher than the year-ago period. Yielding 4.1%, analysts are looking for earnings to grow almost 7% in the current quarter with similar growth projected over the next five years. Investors are being rewarded for their loyalty and patience, and with interest rates not likely to rise anytime soon, as the Fed is under pressure to keep stimulating the economy, I nevertheless expect Arrow to outperform for the immediate future.

Herbalife
After hedge fund operator David Einhorn caused more than a stir by his presence on an Herbalife earnings conference call earlier this year, the nutritional-supplements maker has gone about trying to restore order. It raised full-year guidance ahead of analyst expectations and is trying to initiate a more shareholder-friendly corporate governance outlook.

Herbalife has eased back a bit from the gains it made after the fall, and trades at less than 11 times earnings estimates -- better than NutriSystem (Nasdaq: NTRI), which runs north of 14 times estimates, though ahead of Weight Watchers at 10. Yet with its enterprise value going off at 13 times free cash flow, it's not exactly expensive, but NutriSystem looks better with an 8.6 EV/FCF ratio, whereas Weight Watchers looks more bloated with its EV at more than 17 times FCF. Thus, I still like Herbalife to continue improving from the low point it struck, and I've rated it to outperform the market averages on CAPS.

Tempur-Pedic
They say hope springs eternal, so undoubtedly that's why specialty mattress maker Tempur-Pedic is wafting higher in the minds of investors. Housing data has looked encouraging lately, at least from some angles, and with a growth catalyst centered around more people buying new homes (presumably leading to buying new mattresses), the mattress maker even opened its first retail store. Following the lead of Select Comfort (Nasdaq: SCSS), Tempur-Pedic will also now sell its sleep aid in a bricks-and mortar location.

I'll admit to liking the low-overhead-cost business model that Tempur-Pedic previously operated under, but as the saying goes against shorting stocks, markets can be irrational longer than you can stay solvent. So, I'll be rating the stock to outperform the irrational market, but tell me in the comments section below whether you'll be able to sleep soundly knowing it's branching off in this manner.

Three for free
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