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 investors marked up before their share prices rose over the past three months. My screen returned just 153 stocks when I ran it, no doubt reflecting the market's turmoil during that time, and included these recent winners:
| Stock | CAPS Rating July 27, 2012 | CAPS Rating Oct. 29, 2012 | Trailing-13-Week Performance |
|---|---|---|---|
| Tempur-Pedic | ** | *** | 62.3% |
| Federal Signal | ** | ***** | 38.8% |
| Financial Engines | ** | *** | 36.9% |
Source: Motley Fool CAPS Screener; trailing performance from Oct. 26 to Jan. 25. CAPS rating out of 5.
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 35 stocks the screen returned, here are three that are still attractively priced but that investors think are ready to run today:
| Stock | CAPS Rating Oct. 26, 2012 | CAPS Rating Jan. 25, 2013 | Trailing-4-Week Performance | P/E Ratio |
|---|---|---|---|---|
| Darden Restaurants (DRI 0.46%) | ** | *** | 3.2% | 13.1 |
| MainSource Financial Group (NASDAQ: MSFG) | ** | *** | 6.2% | 9.5 |
| Pinnacle West Capital (PNW 0.05%) | ** | *** | 5.5% | 15.9 |
Source: Motley Fool CAPS Screener; trailing performance from Dec. 28 to Jan. 25. CAPS rating out of 5.
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.
Darden Restaurants
A persistently weak economy is pushing casual-dining chains to offer value meals like the popular "2 for $20" promotions at TGI Friday's, DineEquity's (DIN 0.31%) Applebee's, and Brinker International's Chili's. DineEquity, in particular, saw net income triple to $58.7 million as a result of strong performance at Applebee's, and while the GAAP profits were largely a result of converting to a fully franchised business model, the chain still enjoyed a 2% increase in same-store restaurant sales.
That's forcing the hand at Darden Restaurants to join suit as Red Lobster, Olive Garden, and LongHorn Steakhouse suffered a collective 2.7% decline in comps last quarter, with Olive Garden's 3.2% decline being the worst. During the conference call, management suggested the sub-$15 price point was where it was aiming.
It won't be easy to turn things around as the fast-casual niche dominated by Panera Bread and Chipotle Mexican Grill offer good food at reasonable prices in a setting that offers faster service than tableside. But recognizing you have a problem is the first step in correcting it, and Darden shows it understands what it needs to do to compete.
MainSource Financial Group
Midwest regional banks like MainSource Financial Group have been burning up the stock charts as a wave of mortgage refinancing has bolstered gains made in loan origination. MainSource saw profits surge 21% last quarter as mortgage banking income rose while it was able to lower loan loss reserves because of an improving asset quality profile. Nonperforming assets, including troubled debt restructurings, dropped to 2.09% of total assets, an 84-basis-point decline from last year and 10 basis points below where they stood in the prior quarter.
Like Darden, MainSource still faces a difficult operating environment, as it expects loan growth to be minimal amid a low-interest rate environment, but with problem loans also expected to decline further, it should be able to build on the gains already made.
Pinnacle West Capital
Although Pinnacle West Capital sounds like it could also be a Midwest regional bank, it's actually an Arizona utility operator, and it hasn't performed nearly as well as the financial institutions. Last quarter, cool weather was the main reason the 4% earnings drop contributed to a $0.17-per-share decline in EPS. Averaging only 103 degrees in the quarter, temps were milder than normal and were 3 degrees below what was recorded in the same period in 2011. (This East Coast boy would easily have been running his air conditioner full tilt regardless.)
While Pinnacle also increased its customer count by 1.2%, which should help generate higher revenues in the future, Arizona, New Mexico, and Nevada have been hit by an actual freeze this month, with temperatures plunging at night to as low as 19 degrees. It could signal some weakness in the coming quarter's results even if the long-term outlook remains positive.
