3 Stocks Ready to Roar

There are plenty of strategies for picking stock winners: low-P/E stocks, companies with discounted cash flows, and more. Over at the small-cap stock-picking service Motley Fool Hidden Gems, the analysts are beating the market by 25 percentage points by finding undervalued stocks that the market and investors have ignored.

Not bad. But 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 Motley Fool CAPS investor-intelligence database, 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. That underscored the results of the first year of data collection, which suggested that CAPS' highest-rated stocks performed best, while its lowest-rated companies fared worst.

My screen returned some 27 stocks. It included these recent winners:

 Source: Motley Fool CAPS screener.

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 just moved up to three stars or better, sport valuations lower than the market's average, and whose price hasn't moved up over the past month by more than 10%. That gave me a field of 26 stocks that are still attractively priced, but that investors think are ready to run today! Here are three of them:

 Source: Motley Fool CAPS screener.

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

Family Dollar
Stretching your dollars in a recession just makes sense. It's one of the reasons Wal-Mart (NYSE:WMT) has been able to confound the experts and exceed expectations. It's also why Family Dollar saw last month’s sales and comps rise nearly 11% and 8%, respectively. Getting the best return for your money is just as important when shopping as it is when investing. The poor economy is also a reason investors like top-rated CAPS All-Star ShuntSD expect the dollar stores to advance:

As the homes are foreclosed, cars are repo'd and credit cards written off, these stores will have a much larger customer base.

Ross Stores
It's a similar situation over at Ross Stores, which sells discounted clothes and home accessories. Same-store sales also rose 8% last month, compared to a 4% increase last year. And while the overall economic outlook is downright gloomy, Ross' is much brighter, with comps expected to rise 2% to 4% this month compared to the flat expectations it had earlier. Of course, some smart investors, like All-Star CAPS player falcon2382, feel that Ross' valuation has exceeded its financials even in the face of a compelling economic climate:

Bottomline: Ross usually does quite well this time of year because college students have to go buy suits and ties and skirts etc... This explains the extremely predictable hills and values in the 5 year stock chart. But with a PE of 18.43 (high given the current eco. environment) and a price to book of 5x I think Ross is very expensive right now.

Deluxe
Best known for its personal and business check-printing business, Deluxe also offers a host of financial services that includes gift cards, loyalty programs, and fraud monitoring and protection services. Its small-business segment generates almost 60% of revenue, and while that has been suffering at the hands of the slowing economy, its financial-services arm has been picking up the slack. Considering that the market has been slapping Deluxe down, CAPS investor evillate thinks a bottom has been reached:

Picking a bottom. Business might slow a little but not to the point this gets a beating like this. Still a good company with strong EPS for the rest of the year.

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 let us hear what you've got to say about these, or any other stocks that you think are starting to rev their engines?