With the Dow Jones Industrial Average ($INDU) hovering around 11,000, Hilary Kramer, the editor of GameChangerStocks.com, says that in the short-term, stocks will continue to rise. Driving shares up will be first quarter earnings, which are expected to triple over year-ago comparisons.

But Kramer warns that once earnings season is over, investors should brace for a pullback of 7% to 10%. In this interview, Kramer talks about her views for the market, her strategy for picking winning stocks in unpredictable times and then recommends three undervalued stocks with great prospects.

Watch the video for Hilary's picks.


Hilary Kramer is the editor of Hilary Kramer's GameChangers.

The market declines continue and I think the worst is yet to come. Opportunity is pounding at your door and some prudent money shuffling might reward you with some real value buys out there. I've done some stock tip searching to find companies that are being pointed out at as considerably undervalued. I'm providing you the names and links, but you need to do the homework. As always, be certain of the tax ramifications before you move that money around.

Starbucks (NASDAQ: SBUX) has been identified by more than one analyst as being undervalued. Similar to General Electric (NYSE: GE), it's a matter of perceived value more than a balance sheet issue.

Zac Bissonnette wrote today about the value condition of Adams Golf Inc. (OTCBB: ADGO). You'll probably want to check that one out.

In the energy sector, Harvest Natural Resources (NYSE: HNR) is being pointed at as undervalued. Activity is picking up slightly on that name today. It might be a nice time to jump in. Chevron Corp. (NYSE: CVX) is also being mentioned as currently undervalued, although I can't imagine why.

According to the efficient market hypothesis (EMH), a company's stock price constantly adjusts to reflect all the currently available information about that company. If the theory was correct, then there would be no such thing as an under- or over-valued stock.  And it would be impossible for a stock's return to beat the market's.

But in practice, some stocks seem to beat the overall market over long periods of time. Consider Yahoo!. Over the last decade, Yahoo!'s stock price has climbed an impressive 2,500% while the S&P 500 has mounted a less impressive 100% rise. Over the last year, however, Yahoo!'s stock has lost 4.3% of its value while the S&P 500 increased 13%. Does Yahoo!'s short-term under-performance indicate that Yahoo!'s stock price is likely to continue to tumble and that it ultimately will conform to the EMH's prediction?

I don't know the answer to this. One valuation theory that I've used is that a company's stock price is cheap if its price/earnings ratio is lower than its earnings growth rate. And if the median of analysts' predictions for its earnings in 2006 and 2007 are correct, Yahoo!'s earnings growth rate is higher than its price/earnings ratio.

Does this mean that Yahoo! stock is undervalued?  Well, the consensus of 25 analysts polled by Zacks is that that Yahoo!'s earnings will grow 36%, from 56 cents a share in 2006 to 75 cents/share in 2007.  And Yahoo!'s P/E on current earnings is 25.8. For those investors who prefer to compare the earnings growth to future earnings, however, Yahoo! trades at a P/E of 58.9 -- making the stock overvalued at its current $32.30. But if you believe in that valuation method, it would take a 58.9% earnings growth rate to justify Yahoo!'s current stock price.