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Stockpickr: This Week's Rocket Stocks

James Altucher

So much liquidity is hitting both this market and the global markets in general that the inevitable is happening: All of the low-hanging fruit is getting acquired.

As I've been doing each week since the start of TheStreet.com's Beat the Street contest, I've compiled a list of stocks for this week that I believe have the catalysts to send them soaring in coming days. For this week's portfolio of potential rocket stocks, however, I focused on names that might be potential takeover targets.

To compile the portfolio, Contest Stocks V, I gleaned these ideas from other Stockpickr portfolios:

• Top 20 Most Volatile Stocks on Earnings Day, the stocks that have historically risen, or fallen, the most on earnings day. Earnings season is still in full force this week.
• Top Nasdaq Short Interest, the major Nasdaq stocks and their corresponding short interest.
• Top 10 Potential Short Squeezes, a list of stocks with high short interest and high insider buying.
• Top Tech Takeover Targets, a list of technology companies that appear to be in the sweet spot to get acquired.

I also made use of Stockpickr's Mean Reversion System to find stocks that have triggered the system but where we can still get in below the system price. Basically, if a stock falls more than 10% below its 200-day moving average, buy and hold until it goes above 5% below its 200-day moving average. The portfolio link provides the historical results of the system, but it's been reliable in bull and bear markets.

Our first stock, BEA Systems(BEAS), has been triggering the Mean Reversion System. With BEA, the system has worked nine out of 12 occurrences since 1998 for an average return of 5% per trade. The trade this time has been open since May 1 at $11.14, providing an opportunity to get a better price than the system.

I believe BEA is a huge takeover candidate. With all of the liquidity sloshing around in the market, this company will get taken over; it's just a question of when.

I also like that deep-value investor Bruce Sherman of Private Capital is long the stock. More than 40 companies Sherman has held in his portfolio have been acquired in the past few years.

I believe potential acquirers of BEA Systems include Oracle(ORCL), Microsoft(MSFT) and even Symantec(SYMC).

Let's next take a look at j2 Global Communications(JCOM), the Internet fax company. The Los Angeles-based company reports earnings after the close Monday. Analysts are expecting 32 cents a share, up from 26 cents a share a year ago. There are a few key points to note about j2:

• Heavy short position: With 4.28 million shares short, and given the average daily volume, it would take more than seven days for the shorts to cover their position if the stock were to rise.
• Excellent balance sheet: j2 has about $150 million net cash in the bank and almost no debt.
• j2 has exceeded or met earnings estimates for the past four quarters.
• Analysts have been upping their estimates over the past 90 days.
• The stock trades for only 18 times estimated earnings for 2008, with analysts expecting earnings per share to climb from $1.40 in 2007 to $1.65 in 2008.

I've pointed out j2 Global before, featuring it in the portfolio Who Will Cisco Buy Next?, in which I state:

J2 Global is also an interesting play here. The company provides Internet faxing (it used to be called JFax), conference calling and other CRM, or customer relationship management, services. A combination of WebEx(WEBX) and j2 Global would result in a truly unified communications platform for the enterprise.

Similar to Akamai(AKAM) and WebEx (other members of the Who Will CSCO Buy Next? portfolio), j2 Global trades at 15 times cash flow. It has about $156 million cash in the bank with essentially no debt, so the balance sheet is pristine. Last year it had EBITDA of $78 million and 21% revenue growth.

This year, analysts are estimating revenue to grow from $181 million to $223 million. That's substantial growth for a company that is trading at only a slightly above-average P/E compared to the market-at-large.

j2 Global also makes The Forbes Top 10 list, a portfolio we created on the basis of a Forbes article last fall on the top 200 small companies in the U.S.

Finally, there's Evergreen Energy (EEE), a company I've pointed out before. In the past few months, shares of the clean-energy plant maker fell from above $10 to lows in the $5 range before recently bouncing into the $7s.

In a portfolio I set up a few weeks ago, the Beat the Street Watchlist, I said of Evergreen:

Everyone is worried that this clean coal company will lose its deal with TXU(TXU) to build a clean coal plant now that TXU is being bought by KKR. The stock has fallen from the $9s to the $5s since the TXU/KKR deal was announced.

But the reality is that KKR has already stated it will keep the environmentalists happy, despite a planned shutdown of several TXU plants. The Evergreen deal is going to stay intact, and this stock should make its way back to the $9s.

The news that got Evergreen shares back into the $7 range was that well-known short-seller Manuel Asensio, who had been shorting the stock, is now bullish on the company. There are 18 million shares short of Evergreen. This stock is going to head back into the $9s or higher pretty quickly, particularly if TXU takes steps to start building these plants.

For the rest of potential rocket stocks of the week, check out the Contest Stocks V portfolio on Stockpickr.

Also, if you haven't checked it out yet, please try out our newest feature Stockpickr Answers. You can ask questions and answer them, and you can see the "Top analysts" as well as Jim Cramer's latest answers.