These Stocks Are Revving Their Engines

There are plenty of strategies for picking stock winners: looking for low price-to-earnings ratios, high growth, contrarian indicators, and more. The small-cap stock-picking service Motley Fool Hidden Gems has successfully found undervalued, underfollowed stocks to generate outsized returns.

Yet these are all backwards-looking approaches. What if we could find a way to whittle down our list of prospects to a group of stocks whose engines are just getting warmed up?

Maybe we can.

Using the new screener at the investor-intelligence database Motley Fool CAPS, I looked for stocks that the community marked up before they began a run of 25% or more over the past three months. The results of that search underscored the results of CAPS' first year of data collection, which suggested that stocks that are moving up really do outperform the market.

My screen returned 39 stocks and included these recent winners:

Source: Motley Fool CAPS Screener. CAPS ratings are from one to five stars; returns are from 3/28/08 through 6/27/08.

That information tells us which stocks we perhaps should have looked at three months ago, but we want to see the stocks we ought to be looking at today. So I went back to the screener and sought out stocks that just bumped up to three stars or better, sport valuations lower than the market's average, and have a price that hasn't moved up over the past month by more than 10%. That gave me a field of 20 stocks still attractively priced but which investors think are ready to run today! Here are three of them:

Source: Motley Fool CAPS Screener. Returns between 5/30/08 and 6/28/08.

Let's look at why investors might think these companies will go on to beat the market.

Parametric Technology
This company's software solutions enable customers to create digital product designs and component-based documents on their desktops or via the Web. Despite a weak North American market, a November acquisition helped boost results in Europe and allowed Parametric Technology to beat analyst estimates. Investors have just recently noted Parametric's valuation discount, but CAPS player pickInvestProfit wrote last November that sales have been on the rise. "Parametrics has had steady sales growth, is very competitive in [its] market, continues to deliver and is a global player. It shouldn't be affected as much by the dollar and is moderately recession proof."

Mohawk Industries
The floor-covering company has been laying the groundwork for a recovery, even if the housing industry upon which it has historically depended takes longer to gain a foothold. Mohawk Industries has branched out to become a full-service flooring and tile company, and when housing again does turn up, Mohawk will already be on a well-trod pathway to profits. CAPS investor athenamike finds it in a dominant position along with Shaw:

Mohawk is one of two dominant firms in the flooring business (the other being Shaw at Berkshire Hathaway). With dominant market share, rational competition, and a management team that has a good record of doing acquisitions at smart prices, I believe this company can achieve 11% returns on equity and 11% growth over the next 5 years. That would make this an attractive investment.

SAVVIS
This company, which offers networking, Internet, and application services to financial-services companies and midsize businesses, just cemented a one-year contract extension with Thomson Reuters to support its Asia expansion. But it wasn't too long ago that SAVVIS was perhaps the worst stock in the world when it cut guidance, again. CAPS investor actster thinks management has been rightly laying the groundwork for a turnaround in its business:

The new Savvis management has been concentrating its business model, retiring debt and investing in the future. Contrary to Morgan Stanley's short term view that business isn't going to want to buy Savvis' product because they're "shoring up" their beleaguered bottom lines, Savvis' services reduce a subscribing business' cost of I.T. As the next business cycle rolls around, I believe this company will be in a good position to reap the rewards of their planning.

Three for free
That's what investors are saying about these three stocks, but there are thousands of others ones in the CAPS universe. Come on over to the completely free CAPS service, and let us hear what you have to say about these or any other stocks that you think are starting to rev their engines.