3 Stocks Ready to Roar

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There are plenty of strategies for picking stock winners, from finding low-P/E stocks to seeking companies selling at a discount to their future cash flows. At the small-cap investment service Motley Fool Hidden Gems, even in this market, the analysts are able to stay ahead of the pack by finding undervalued stocks that Wall Street and investors have ignored.

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

Using our investor-intelligence database at Motley Fool CAPS, I screened for stocks that investors marked up before their share prices rose over the past three months. My screen returned just 23 stocks when I ran it, no doubt reflecting the market's turmoil during that time, and included these recent winners:

Stock

CAPS Rating, 2/18/11

CAPS Rating, 5/18/11

Trailing-13-Week Performance

Konami*****79.7%
Antares Pharmaceutical*******31.2%
National Beverage*****10.7%

Source: Motley Fool CAPS Screener; trailing performance from May 20 to Aug. 17.

While this screen might tell us which stocks we should have looked at three months ago, we'd rather find the stocks that we ought to be looking at today. I went back to the screener and looked for stocks that were just bumped up to three stars or better, sport valuations lower than the market's average, and haven't appreciated by more than 10% in the past month.

Of the 63 stocks the screen returned, here are three that are still attractively priced and that investors think are ready to run today:

Stock

CAPS Rating, 5/18/11

CAPS Rating, 8/17/11

Trailing-4-Week Performance

P/E Ratio

China Yuchai (NYS: CYD) *****(20.1%)3.5
Limited Brands (NYS: LTD) *****(14.5%)13.3
Sherwin-Williams (NYS: SHW) *****(7.6%)16.1

Source: Motley Fool CAPS Screener; price return from July 22 to Aug. 17.

You can run your own version of this screen over on CAPS; just remember that the data's dynamically updated in real time, so your results may vary. That said, let's examine why investors might think these companies will go on to beat the market.

China Yuchai
Results from diesel-engine maker Cummins (NYS: CMI) should provide hope that China Yuchai will continue growing as well, despite the fact it saw earnings drop 14% last quarter. While the stock was punished harshly for the miss, particularly as it reported results right when the markets were losing their mind, it's rebounded 18% from the lows it hit.

Cummins said that even though its rate of growth will probably slow somewhat in China as a result of the country's efforts to contain inflation, demand in the country remains strong and it's expanding capacity there. Likewise, Yuchai continues to see strong demand for its diesel engines, and it, too, is looking to increase capacity.

With 92% of the CAPS members who've rated China Yuchai thinking it will outperform the broad market averages (including me), there's an expectation that it can continue driving ahead. Let us know on the China Yuchai CAPS page whether you think the investments in new facilities will pay off.

Limited Brands
Victoria's Secret maker Limited Brands slipped into something a little more comfortable this quarter: better-than-expected earnings, higher comps, and greater expectations for the future.

The retailer joined higher-end chains like Nordstrom (NYS: JWN) and Macy's (NYS: M) in beating expectations even as consumer confidence in the economy fell sharply. It suggests that the lean times they went through recently better prepared them for handling leaner inventories and not marking down clothes so quickly. Limited kept an eye on expenses and didn't let inventories get out of hand, allowing it to sell more full-priced clothing.

CAPS member NarGuy finds much to like about the retailer.

Superior brand image, name, and dividend yield. Shareholder friendly company, run by women selling women's attire. Great company.

You can add Limited to the Fool's free portfolio tracker and keep tabs on its progress over the coming quarters.

Sherwin-Williams
With the housing market still dead, we're not likely to see paint maker Sherwin-Williams growing by leaps and bounds. And specialty chemicals maker Huntsman (NYS: HUN) found it was able to raise prices on titanium dioxide, a key ingredient in paint, so it was no surprise that when it reported earnings last month, it said it had felt the pinch of higher raw-material costs.

Maybe there weren't any arched eyebrows, but the market still sold the stock off, and it's down nearly 20% from its 52-week highs. It lost the Wal-Mart contract last year, and that's hurt its consumer paint division.

But Sherwin-Williams' main customer is the professional painter, so Wal-Mart sales, while important, also made up the smallest portion of its revenues. Thus it's still looking for a 10% to 15% increase in net sales next quarter.

It's not like the paint maker is running red ink, and since 90% of CAPS All-Stars rating Sherwin-Williams think it will be able to still paint in black in the future, the new lower price could mean it's reaching a better buy-in price.

Let us know on the Sherwin-Williams CAPS page whether you think this business is ready to climb the heights once again.

Three for free
Are these companies still a good value and ready to make their move? I'm heading over to CAPS to mark them to outperform the broader averages. If you agree, join me there, or let us know in the comments section below whether you think these or any other stocks are starting to rev their engines.

At the time this article was published The Motley Fool owns shares of Limited Brands and Wal-Mart. Motley Fool newsletter services have recommended buying shares of Wal-Mart and Sherwin-Williams and creating a diagonal call position in Wal-Mart. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.Fool contributor Rich Duprey has no financial position in any of the stocks mentioned in this article. You can see his holdings. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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