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 just 49 stocks when I ran it, no doubt reflecting the market's turmoil during that time, and included these recent winners:
Source: Motley Fool CAPS Screener; trailing performance from Feb. 17 to May 17. 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 30 stocks the screen returned, here are three that are still attractively priced, but which investors think are ready to run today:
American Railcar Industries (NAS: ARII)
Community Health Systems (NYS: CYH)
ValueClick (NAS: VCLK)
Source: Motley Fool CAPS Screener; price return from April 20 to May 17. CAPS rating = out of five stars.
You can run your own version of this screen over on CAPS; just remember the data are 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.
American Railcar Industries
If railroads hold as much promise as Warren Buffett suggests -- and the performance of freight operators like RailAmerica and Canadian Pacific Railway would suggest they do, with shares up 80% and 35%, respectively, over the last six months -- then a company that manufactures the railcars used on the railroads ought to be a winner, too.
American Railcar Industries is up only 4% in that same time period, having given back about a third of the gains it made recently, but its latest earnings report showed that robust demand for its tank and hopper cars remains strong and it has almost 6,200 cars in its backlog. That should provide for some stable production numbers for the rest of this year at least, which might be why all eight Wall Street analysts tracking the railcar maker on CAPS see it outperforming the broad indexes.
No doubt economic concerns are weighing on the stock, but with 86% of the CAPS members rating it also having a similar belief in its prospects, you can add American Railcar's stock to the Fool's free portfolio tracker if you think it can climb the mountain of worry that has knocked its stock back.
Community Health Systems
Hospital operator Community Health Systems has finally turned the corner on positive growth in organic patient admissions, causing it to lag behind other for-profit hospitals. After two straight years of negative comps, CHS record its first uptick last quarter, which bolstered otherwise healthy revenues and operating profits.
Although ratings agency Fitch Ratings sees few levers it can pull at the moment to increase patient volumes further, and is cautious about its ability to maintain its pricing policies in the face of changes to Medicare and Medicaid reimbursement policies, the company has shown a knack for maintaining margins even as it acquires lower-profitability hospitals. It attempted to acquire Tenet Healthcare two years ago.
As CAPS member Bubbalooey notes, CHS is the subject of several investigations into its billing practices, but again Wall Street is unanimously behind its coming out right in the end and 94% of the All-Star CAPS members weighing in agree. At less than six times earnings estimates and trading at a fraction of its revenues, it does seem somewhat inexpensive, but let us know on the Community Health Systems CAPS page if you expect the market to give it a good checkup.
Internet ad agency ValueClick got crushed to start off the month of May after reporting first-quarter earnings that beat analyst expectations on the bottom line, but missed revenue forecasts by a wide margin. Worse, its guidance for the second quarter was also below analyst estimates by a good deal and this left some analysts feeling there were few catalysts to spark new growth.
Admittedly, its owned and operated website business, which accounts for more than 22% of its total revenues, suffered a 7% decline in sales, but its media segment, which represents 47% of consolidated revenues, nearly doubled. With owned and operated websites expected to continue their decline, ValueClick will be relying more upon the media niche to prop up the whole as it forecasts 85% growth in revenues.
Considering the rest of its business is strong and going like gangbusters, it need only mildly improve owned and operated to achieve stellar results. Hey, if it was that easy, rival Yahoo! (NAS: YHOO) wouldn't be the basket case it is now, but it does portend an easier fix than what the market is giving it credit for.
There's no unanimity on Wall Street, but only one analyst thinks it will lag the market indexes, and with 94% of the broader CAPS community marking the ad shop a buy, it seems ValueClick still has more value in it.
Tell us on the ValueClick CAPS page or in the comments section below if you think this is a case of throwing the baby out with the bathwater.
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 contributor Rich Duprey holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of RailAmerica. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.