The Next 5 Stocks to Buy?

It's often tough to find the right words for an apology. J. Crew (NYSE:JCG) seemed to have found the mot juste last week when it sent out an apology letter acknowledging problems with its overhauled website. Then a funny thing happened. Over the next couple of days, the letter posted on its website was overhauled, until the names of the president and chairman were excised from it, along with most of the verbiage.

While it's amusing to watch a company torture itself trying to figure out how it really wants to say it's sorry, the retailer hasn't had many reasons to smile lately. Although J. Crew's same-store sales rang in 2% higher, at a time when Gap (NYSE:GPS) was dropping comps 11% and American Eagle Outfitters (NYSE:AEO) was down 6%, that came on the heels of a severe lowering of full-year earnings guidance.

Yet the high-quality retailer has been expanding its store count regularly, going from just more than 200 stores in 2006 to more than 265 today. It's been able to expand its square footage, as well as the amount of sales per square foot. At the start of the current fiscal year, that figure was $573, for a 10% compounded growth rate over the past five years. Gap stores, on the other hand, have been in a state of contraction for the past several years, and American Eagle has had uneven success.

The sluggish and spotty performance of J. Crew's website, which resulted in the oft-changed apology letter, is a signal that Chairman Millard Drexler isn't content to let situations dictate how the company responds. Apparently, the site's failings were a case of too much, too soon, but when the bugs are ironed out, consumers ought to have a better shopping experience.

Screening for likeability
J. Crew showed up on a screen of companies that have enjoyed growing investor support these days after wallowing on the outs six months ago. J. Crew jumped from a two-star Motley Fool CAPS rating back in May to a three-star-star rating today, while also enjoying a valuation below that of the market.

CAPS is a 115,000-plus-member investor community that rates thousands of stocks on whether they will outperform or underperform the market. While not a predictive service, our research has found that the 18-month returns of stocks in the CAPS universe correlated precisely with their relative CAPS ranking. Top-rated three-, four-, and five-star stocks outperformed low-rated one- and two-star stocks.

Here are a few of the other companies the CAPS screener found that are currently enjoying significant investor support:

Source: Motley Fool CAPS; Morningstar.
*For next fiscal year.

Naturally, this is not a list of stocks to buy and sell, but rather a starting point for further analysis. Investors have raised their outlook significantly on these companies, and Fools can best achieve long-term outperformance by investing in growing, well-run companies that consistently increase shareholder value.

A fine mesh filter
There's a bit of risk factored into J. Crew's share price, since the retail market is a dicey place these days. The retailer whose name has become shorthand for "preppiness" looked like it was going to turn things around ahead of the competition earlier this year, only to suffer a bit of a setback last quarter.

Great leadership is one of the key components to finding some of the best companies to invest in, and CAPS member jwhite3 last week cited Drexler as one of the main reasons for J. Crew's success:

Drexler is a genius. I used to work for Jcrew, so I saw the way things were run as an employee. It is one of the best managed organizations I have ever seen, the best I have ever worked for. Excellent store placement, established brand name, back to school, this one will turn around soon from the beating its been taking.

Look what Drexler did with GAP. Jcrew will do well over the next few months and long term into the future.

Takes a CAPS bow
There are many ways to screen for stocks to beat the market. You can use the new CAPS screener to find other stocks you might want to own, and then start your own research 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.