THE BLOG
04/18/2010 05:12 am ET | Updated May 25, 2011

3 Ways To Make a Buck on Pee-Wee Power

Good things, they say, come in small packages.

Let's apply that to the stock market. First though, last March, with Dow trading at around 6,500 and bearish sentiment rampant, the stock market was about as appetizing as the swine flu. Today, about 11 months later, with the Dow hovering around 10,100 and bullish sentiment sharply on the upswing, everyone seems to have suddenly discovered one of those sure-fire, can't-miss stock tips.

Just ask any waiter or bartender. In recent weeks, they have emerged as the hot new stock tipsters.

The fly in the ointment, however, is that the majority of those sure-fire, can't-miss stocks are often turning out to be no sure thing. Not only that, the can't- miss aspect of these stock tips is all too frequently little more than a garden of illusion.

Still, let's say you share Wall Street's growing party line that things are looking up despite all the risks and uncertainties, and you think now is the right time to be a player, what do you buy?

For some ideas, I turned to the latest recommendations of veteran investment adviser Richard Moroney, who is the editor of Upside, a relatively unknown monthly investment newsletter out of Hammond, Ind., that focuses on small and medium-sized stocks.

On the face of it, such a choice might well strike you as questionable since bigger and more liquid names seem a safer and more logical path to take in an increasingly volatile market riddled with lots of unknowns.

Maybe not in this instance because Upside boasts an enviable record of way outpacing Wall Street. For example, the buy list pitched by Upside is reported by the letter to have gained an impressive 242.7% since its inception in May of 1999. Over the same period, the Russell 2000 index has gained 40.9%, while the S&P 500 is down 15.8%.

At present, Upside is gung-ho on three new names, whose stock prices this year are up from 11% to 22%. They also sport modest price-earnings multiples ranging from 13 to 16. These are not penny stocks, but range in price from roughly $30 to $45, and each is viewed by Upside as a potential 15% to 20% gainer over the next 12 months.

One is Big Lots ($30.61), the country's largest broadline retailer, which is thriving in a difficult economy. The company, which operates 1,374 stores in 47 states, offers a variety of merchandise, including electronics, furniture, housewares and toys, at prices 20% to 40% below those of traditional discount retailers.

Big Lots reported impressive preliminary January quarter results. Per-share earnings for the period are pegged at between $1.19 and $1.24, up from management's prior guidance of between $1.09 and $1.14. Meanwhile same store sales, fueled by strong demand for electronics, are expected to climb 3.5% to 4.5%, versus a prior forecast of 1.5% to 2,5%.For fiscal 2010 ended last month, per-share earnings are seen running $2.25 to $2.30, implying at least 19% growth. Wall Street's consensus for Fiscal 2011 is $2.56.

Although the stock has more than doubled over the past year, Moroney believes strong operating momentum and a moderate valuation point to further gains.

Another new name at Upside is Cooper Cos. ($38.33), the world's third largest contact lens maker. It offers specialized lenses for astigmatism and presbyopia and also sells a broad range of medical devices, diagnostic products and surgical instruments, primarily for women.

Cooper has been benefiting from product launches and an expanding international presence. Looking ahead, Moroney reckons improved margins and contributions from acquisitions should spur growth.

For fiscal 2019 ending in October, consensus estimates project per-share earnings will increase 11% to $2.54 on a revenue gain of nearly 5%. Over the next five years, earnings are expected to increase at a 13% annualized rate.

Moroney acknowledges that Cooper faces potentially aggressive pricing and promotional activity from such competitors as Johnson & Johnson. Still, he says, Cooper's valuation appears to discount such concerns. The stock trades at 16 times the trailing year's earnings -- well below its five-year average of 26 and 10-year average of 23.

ManTech International ($44.67), a leading provider of technology services to the military -- which focuses on national security programs for the U.S. intelligence community and Department of Defense -- rounds out Upside's trio of new stock buys.

Moroney figures steady demand from government agencies should sustain revenue and backlog growth, while profit margins could benefit from improved cost controls. Meanwhile, he points out, a strong balance sheet and ample cash flow provide flexibility to fund internal growth opportunities and complete acquisitions. Further, new business awards and a continued focus on high-end defense and intelligence markets should fuel growth.

For 2009, per-share earnings are expected to be up 22% on an 8% sales gain. Consensus Wall Street estimates, revised upward in the past month, project per-share profits will climb 9% to $3.40 in 2010, an analyst that could head higher as analysts incorporate contributions from acquisitions and recent contract awards.

The stock, as Moroney sees it, is reasonably valued at 14 times expected earnings and seems capable of reaching $55 to $60 over the next 12 months.

The message here: Don't ignore the money-making opportunities of pee-wee power.

What do you think? E-mail me at Dandordan@aol.com.