3 Stocks Ready to Roar

There are plenty of strategies for picking stock winners: low P/E stocks, companies selling at a discount to their future cash flows, and more. At the small-cap stock picking service Motley Fool Hidden Gems, even in this market the analysts are beating the market by 13 percentage points 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 15% or more over the past three months. That underscores the research suggesting that CAPS' highest-rated stocks performed best, while its lowest-rated companies fared worst.

My screen returned 12 stocks when I ran it, and included these recent winners:

Source: Motley Fool CAPS screener; price return from July 18 close to Oct. 16 close.

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 just bumped up to three CAPS 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%.

Here are three stocks of the 63 the screen returned that are still attractively priced, but which investors think are ready to run today!

Source: Motley Fool CAPS screener; price return from Sept. 19 close to Oct. 16 close.

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

HealthSpring
Medicare insurer HealthSpring has been enjoying some strong growth and doesn't expect that recent legislative changes made to the federal program will impact it in any material way. When it released its latest earnings report back in July, it increased its guidance for the coming quarter. That was just a few weeks after CAPS member ccNikolai marked it to outperform the markets because of solid financial footing:

Medicare play. Regional play mostly in the south. Growth is slowing in older areas but their Florida acquisition is promising. A strong balance sheet and an eye for opportunities should provide expansion ...

JPMorgan Chase
Right in the thick of the credit crisis and bailout measures has been JPMorgan Chase, scooping up the detritus of the market that was too weak or wounded to continue on its own, much like Bank of America (NYSE:BAC). It picked up Bear Stearns earlier in the year and got Washington Mutual's banking operations when it failed out, so it's not exactly surprising that it just reported earnings that were down 84% from last year, particularly when you consider its exposure to investment banking, credit cards, and mortgages. Top-rated CAPS All-Star dbhealy figures that the House of Morgan is a large, well-diversified institution that will eventually prove its worth:

i'm not betting against the american economy in the long run. we probably haven't seen the bottom yet, but i'm not trying to time the market here - just looking for well-diversified, large caps that have tangible asset valuation on their books.

I-Flow
I-Flow's ambulatory drug delivery system has been profitable, as the company has sought to carve a niche in pain management for post-surgical pain relief and surgical site care. Having now received FDA clearance to begin clinical trials on its new oxygen-enriched wound dressing, I-Flow could see the next stage of its growth when it eventually comes to market. Back in March, CAPS member SportAg22 liked the response I-Flow products were getting from health insurance companies:

The important factor here is that INSURANCE companies are willing to pay for the I-Flow products because of various benefits to the hospital and patients... With any medical product this is vastly important!!! This is a must buy and will definitely outperform ...

Three for free
It pays to start your own research on these stocks on Motley Fool CAPS. Read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made -- all from a stock's CAPS page. 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.