3 Stocks Set to Soar

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 103 stocks when I ran it, no doubt reflecting the market's turmoil during that time, and included these recent winners:

Builders FirstSource




LeapFrog Enterprises




XPO Logistics




Source: Motley Fool CAPS Screener; trailing performance from Jan. 20 to April 19. CAPS rating = out of five stars.

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

Donaldson (NYS: DCI)





Kelly Services (NAS: KELYA)





Vera Bradley (NYS: VRA)





Source: Motley Fool CAPS Screener; price return from March 23 to April 19. CAPS rating = out of five stars.

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.

Filtration specialist Donaldson is counting on top-tier customer Caterpillar (NYS: CAT) to continue selling more of its heavy equipment in China and elsewhere to fuel its own growth. It recently split its shares 2-to-1. While the $75 a stub or so they fetched before the split doesn't seem particularly lofty, it was the highest level they had been at in the company's history. It also increased the dividend it paid shareholders 7%, raising the quarterly payout to $0.08 per post-split share.

With 90% of the 204 CAPS members rating the filter company expecting it to outperform the market indexes, it appears they're willing to pocket the extra shares and take the higher dividend to wait and see what Cat can do. Add Donaldson's stock to the Fool's free portfolio tracker to see if it can dig up greater returns.

Kelly Services
Helping brighten up the unemployment picture are temporary positions, such as those filled by Kelly Services and Manpower. Last month, for example, when the rate was said to be at 8.3% as professional and business services added 82,000 jobs in February, more than half of that came from temp positions.

President Obama has a new proposal that could boost temp agencies, as it would allow people to work at temp jobs for short periods while still collecting unemployment benefits. While the economic and fiscal logic seems unsound to me, it's something several states are starting to try. CAPS member Itrmedia thinks the unskilled labor force is a potent one for Kelly:

We will soon have an abundance of uneducated and unskilled labor. Companies will make a lot of money peddling this new commodity...This company is solid and has a head start in the staffing game.

Let us know on the Kelly Services CAPS page if it will be a boon for workers to also collect government checks.

Vera Bradley
Luxury is in. With the IPO of luggage maker Tumian apparent success, the list of publicly traded luxury stocks adept at parting consumers from their money grows ever longer.

Following the trail blazed by handbag maker Coach (NYS: COH) , accessories company Vera Bradley went public in 2010 and has beaten top- and bottom-line estimates handily ever since. Michael Kors popped on the markets last year and it was Tumi's turn this time around. When it comes to luxe, investors have no shortage of ideas. From Tiffany and Luxottica to LVMH and Liz Claiborne, if you want to overpay for products, there are a plethora of ways to do so.

Vera's stock dropped last month after offering up pedestrian first-quarter guidance. Caution is always a plus, but when its bourgeois rivals are on fire, it's hard to imagine Vera will post anything but luxurious results itself. Particularly compared to Coach, CAPS member RScottK26 finds the pricing discrepancy an anomaly to exploit:

ROE over 60%, operating margin over 20%, low debt, and a current ration of 4:1. It does trade at 3.5x sales, but Coach trades at 5x sales. 1/10 the sales of COH, but only 1/15 the market cap. Tons of room to grow (only about 40 of their own stores vs about 500 for Coach.) Also, if earnings are good tmrw the shorts could get squeezed hard.

Tell us on the Vera Bradley CAPS page or in the comments section below if its stock is too rich for your tastes.

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 thisarticle was published Fool contributorRich Dupreyholds no position in any company mentioned.Click hereto see his holdings and a short bio.Motley Fool newsletter serviceshave recommended buying shares of Coach and buying puts on Tiffany. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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