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 were marked up by investors before their share prices rose over the past three months. My screen returned 113 stocks, no doubt reflecting the market's turmoil during that time, and included these recent winners:

Stock

CAPS Rating July 29, 2011

CAPS Rating Oct. 31, 2011

Trailing-13-Week Performance

Mattson Technology******79.4%
NeoPhotonics******35.3%
Jefferies Group******28.7%

Source: Motley Fool CAPS Screener; trailing performance from Nov. 4 to Jan. 30.

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 38 stocks the screen returned, here are three that are still attractively priced, but that investors think are ready to run today:

Stock

CAPS Rating Oct. 31, 2011

CAPS Rating Jan. 30, 2012

Trailing-4-Week Performance

P/E Ratio

Aixtron (NAS: AIXG) *****(0.1%)6.7
Avon Products (NYS: AVP) *****2.5%10.6
DUSA Pharmaceuticals (NAS: DUSA) *****8.9%17.1

Source: Motley Fool CAPS Screener; price return from Jan. 6 to Jan. 30.

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.

Aixtron
LEDs were supposed to light up the industry's future, but government subsidies to Chinese manufacturers created an inventory glut that could take years to work off. Some analysts don't think the trough will be hit until sometime next year. That's going to be a long wait for Aixtron investors like, well, me. Because of its focus on commercial LED applications, industry leader Cree (NAS: CREE) should be able to see benefits sooner. But like Aixtron, which makes components for the industry, sapphire substrates manufacturer Rubicon Technology (NAS: RBCN) finds itself in a similar situation. Both Aixtron and Rubicon have seen revenues fall through the floor as orders have contracted.

Yet there seems little doubt that, unlike compact fluorescents, LEDs are more than just a stepping-stone technology. So once this glut distortion is rectified, Aixtron and others in the space ought to be able to shine brighter than others.

I own shares of Aixtron, but have also rated them to outperform on CAPS because of the long-term potential for the technology. You can track its progress by adding the stock to your watchlist.

Avon Products
It might be personal beauty products maker Avon Products calling, but lately it seems the company has been so out of touch, it's using two tin cans and a string. Under investigation by the SEC for possible bribery in China and improper disclosures to an analyst, Avon just fired its vice chairman, as it appears he was aware of the bribes for years. That comes after chairwoman and CEO Andrea Jung announced last month she was giving up the CEO spot.

Shares of Avon are down more than 40% from their highs, yet the news didn't move the stock all that much, suggesting the market already is discounting the company as much as it's going to for the trouble it's in. And CAPS member MikeMiloserdoff sees a bunch of positives ahead for it:

Semi-luxury goods company for middle-class Americans, coming out of a recession, combined with being at the very low side of its 52 week price range. Lots of room for upward movement with a P/E ratio of 10. The 5% dividend yield adds additional built-in value AS WELL AS investor-type characteristics to the holding, making this a good buy for either an equity-based OR a dividend-based investor.

Add Avon Products to the Fool's free portfolio tracker to see if there's a way to put lipstick on this pig.

DUSA Pharmaceuticals
Hepatitis C may be the hot market at the moment for pharmaceuticals, but DUSA Pharmaceuticals is finding treatment of skin conditions plenty profitable, thank you very much. Revenues jumped 20% last quarter as it sold more of its Levulan Kerastick, a topical solution, and Blu-U, which delivers light at an appropriate wavelength and intensity and is used to activate the therapy.

While DUSA can only market to doctors by suggesting that they use its medication with the company's own light source, the company recognizes that doctors are using light devices from other manufacturers and for other off-label uses as well. DUSA sees that as a sign of potential additional demand and growth opportunities in the future.

Only two dozen or so CAPS members have weighed in on DUSA, but 92% of them believe it will outperform the market averages. I've also marked DUSA to beat the Street, but give us your thoughts on the DUSA Pharmaceuticals CAPS page, then add it to your watchlist to be alerted to any developments that might make your skin crawl.

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, then check out this free report on dividend-paying stocks whose engines are all revved up. You can read it for free, but hurry because it won't be around for long.

At the time this article was published Fool contributorRich Dupreyowns shares of Aixtron SE, but he holds no other position in any company mentioned.Click hereto see his holdings and a short bio. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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