Under the Street's Radar

This week, S&P scouts for the stars of tomorrow by identifying underfollowed stocks with strong fundamentals

Being well-known has its advantages. Prominent local physicians always seem to get reservations at crowded restaurants. Movie stars get goody bags filled with swank gifts just for attending parties. And stocks with extensive coverage by Wall Street analysts often fetch higher valuations than those with a smaller following.

But the fact that a stock gets little notice from analysts doesn't mean it's unappealing. Our goal for this week's screen was to turn up some underfollowed names with attractive characteristics. In our view, stocks with these types of financial statistics are likely to garner more attention from the analyst community in the future.

To take care of the "underfollowed" part, we first looked for outfits with coverage from no more than four Wall Street analysts, based on data from Compustat. (By contrast, tech behemoth Microsoft [MSFT] is followed by 33 analysts, while General Electric [GE] has 19 spreadsheet scouts tracking its every move.)


  Of course, we wanted to be certain these more-obscure names had attractive fundamentals. So we next looked for those with a price-to-earnings growth (PEG) ratio less than 1 -- well below the S&P 500 average of 1.4 -- and a profit margin greater than 5.8%, twice the market median.

Next, we wanted to make sure that while the Street analysts were largely looking the other way, other market pros -- institutional investors -- were paying attention. We sifted for stocks with institutional ownership (as calculated by Compustat) greater than 40%. Also, the percentage of institutional ownership between the last quarter and the quarter before that had to be in the highest 20% of all public companies.

To avoid speculative issues, each stock had to have a share price above $5 and a market capitalization above $500 million. When we finished our screen, these six names emerged. Maybe one day we'll be able to say "we knew them when":