3 Stocks Revving Their Engines

There are plenty of factors to consider when picking stock winners: low P/E, discounted cash flows, and more. Our analysts at the small-cap stock-picking service Motley Fool Hidden Gems are beating the market by 16 percentage points on average by finding undervalued stocks that the market and investors have ignored.

Yet what if we could find a way to whittle down our list of prospects beforehand, finding those whose engines are just getting warmed up?

Using the investor intelligence database of Motley Fool CAPS, I screened for stocks that were marked up by investors before their stocks began a run-up of 20% or more over the past three months. During the first year of CAPS' existence, its highest-rated stocks performed best, while its lowest-rated companies fared worst.

My screen returned 14 stocks, including these recent winners:

Source: Motley Fool CAPS Screener. Return calculated from 4/4/08 through 7/3/08.

While that tells us which stocks we perhaps should have looked at three months ago, what we want are the stocks that we ought to be looking at today. So I went back to the screener and looked for stocks that had recently been bumped up to three stars, sported valuations lower than the market's average, and hadn't had more than a 10% price increase over the past month. That gave me a field of attractively priced stocks that investors believe are ready to run today! Here are three of them:

Source: Motley Fool CAPS Screener. Return calculated from 6/6/08 through 7/3/08.

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

Trina Solar
It's not a mature industry by any means, despite having been around for a few decades. But it looks like the search for alternative ways to fend off rising fuel costs has set solar up for a growth phase. Trina Solar, like all of the plays in the sector, needs to spend to build out its infrastructure, and that's causing concern over the industry's ability to generate free cash flow. While it raises red flags for some analysts, many investors, like CAPS player kevin76013, see it as a necessary course of business that is still finding its feet:

Trina Solar. Solar is not news but the sector is still chock-full of solid growth for the foreseeable future. Trina is better-valued and more vertically integrated than many, has low cost production in China, and has the sense to scale back unneeded expansion.

Energy East
Left hand, meet right hand. In New York, such formal introductions are required, because no one seems to know what the other person is doing in that hyperpoliticized state. Electricity and natural gas services company Energy East has a proposed buyout by Iberdrola, and local officials are all over the map on whether it should be allowed. The latest blow to the deal came when an administrative law judge handed down a non-binding ruling opposing the plan, much in line with what the state's Public Service Commission said. But some politicians support the merger, as does (apparently) the state consumer protection board. The sell-off in the stock after the ruling has investors like thestockstalker thinking it's overblown:

Oversold on news of the NY judge ruling against the Iberdrola buyout. The stock should rebound a few dollars on its own, but there is still a chance that the buyout will go through.

Reliant Energy
Having gotten caught up in the maelstrom unleashed by Enron's implosion, energy provider Reliant Energy has been building its business back ever since, with shares more than quadrupling in value over the past few years. Reliant purchases electricity from others and sells it to its customers. Investors like AzM53 are finding its focus on providing low-cost energy for its customers an attractive proposition. Here's an excerpt from the February pitch:

Striving to be No. 1 in reliability and provide a competitive price cost that is as competitive as any electric power provider. Most of their market fluctuation it appears is due to buyers being unsure of company practices after previous displays. A lot of the volatility in the market doesn't have the effect on elec power producers as it does on other industries. A lot of the fluctuation comes from skeptisism inside the market due to the volatility of other stocks due to economy influence; also theirs still a little fear factor lingering from the past.

Three for free
That's what investors are saying about these three stocks, but there are thousands of stocks in the universe and we haven't yet heard from you. Why not head over to the completely free CAPS service, and share your opinions on these or any other stocks revving up for greatness?