Seven Gems For 2007 Gains

No matter how many times we recommend subscribers hold all our best buys or all our buys, we get requests for our single favorite idea. So, with investors looking to fill out portfolios for the new year, we thought we'd meet such requests halfway.

Upside picks are up nearly 20% this year. Click here to get Upside's complete Buy List.

The stocks reviewed here represent our top seven picks for the year ahead; among the roughly 4,100 U.S. stocks with stock-market values below $3 billion, these seven represent our favorites for 12-month gains.

All seven have strong operating momentum, attractive valuations, strong scores in our Quadrix rating system and the potential to exceed consensus profit estimates for 2007.

In Pictures: Four More Small- and Mid-Cap Market Leaders

Avocent seems likely to reach $43 over the next 12 months. A leading supplier of computer peripherals to businesses, Avocent is gaining notice on the strength of recent results. September-quarter earnings per share surged 52%. Avocent boasts a strong customer base and an extensive international presence, and near-term prospects are bolstered by a growing product line.

Avocent shares have rallied 37% since we first recommended the stock in August, reflecting the strong September-quarter results. Based on the company's growth potential, solid balance sheet and attractive positions in an expanding market, the stock seems reasonably valued at 15 times expected 2007 earnings. Over the last three months, the consensus per-share profit estimate for 2006 has increased $0.18, to $1.99, implying 52% growth. For 2007, the consensus estimate has risen 8%, to $2.40. Avocent is rated a best buy.

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Niche insurer Philadelphia Consolidated said September-quarter earnings per share surged 172%, to $1.28, exceeding the consensus estimate by $0.55. Sales increased 19%. Total net earned premiums climbed 21%. Results benefited from the release of reserves due to favorable prior years' claims experience.

Philadelphia Consolidated markets and underwrites property and casualty insurance, focusing on underserved markets. Product launches and service enhancements should help sustain premium growth and decent pricing. Philadelphia Consolidated boasts a long history of selective and highly disciplined underwriting. The company consistently has one of the lowest loss ratios in the industry--along with exceptionally high renewal rates. At 26%, the company's return on equity is well above the 15% of the average property and casualty insurer.

For 2006, per-share earnings are expected to increase 82%, to $3.75. The consensus for 2007 is $3.28, as more reserve releases are not expected. Still, the stock seems reasonably valued at less than 14 times the 2007 consensus, and the company seems capable of exceeding that target. Philadelphia Consolidated, with the maximum Overall Quadrix score of 100, is a best buy.

Headquartered in Vancouver, Wash., Riverview Bancorp has 17 branches and three lending centers. Recent results have benefited from robust loan growth and improved cost control. Management continues to focus on commercial real estate and construction lending, while improving efficiency. In addition, the company has done a good job growing its asset base. Healthy operating momentum should help Riverview deliver double-digit profit growth in coming years.

September-quarter EPS increased 18%, to $0.26. Net loans rose 19%, with total assets increasing 14%.

On Sept. 30, per-share book value was $8.28, up 8% from a year earlier. Only two analysts follow the stock. For 2006, per-share earnings are expected to increase 19%, to $1.02. For 2007, the consensus per-share estimate is $1.14. Riverview earns an impressive Overall score of 90, compared to 46 for the average U.S. thrift. Riverview Bancorp, trading at a reasonable 12 times expected 2007 earnings, is being upgraded to a best buy.

In Pictures: Four More Small- and Mid-Cap Market Leaders

Excerpted from the December issue of Upside. Click here for more small- and mid-cap stock recommendations from Richard Moroney in Upside.

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