By David Trainer, New Constructs 08.23.07

Many investors have become jittery with recent market turbulence, but our most attractive stocks still earn a passing grade. We separate the A+ stocks from those that earn an F by studying what makes stocks succeed in the market and looking for stocks that meet those criteria.

In this month's most attractive stocks report, available at www.newconstructs.com, we have included 40 stocks, 20 large-caps and 20 small-caps, that should help an investor build an A+ portfolio. For the stocks that get an F grade, see our most dangerous stocks for August.

All of our most attractive stocks are scrutinized to help better understand the true earnings of the companies. Pushing aside Wall Street research and company press releases, we look at the official filings the company has submitted to the Securities and Exchange Commission.

To ensure we have gathered all the financial facts needed to understand corporate profitability, we examine income statements, balance sheets, cash flow statements and, most importantly, the notes to the financial statements. Our analysis of these notes produces financial insights that give our models and research an analytical advantage.

Most attractive stocks have high-quality profits based on rising returns on invested capital (ROIC) and positive economic earnings. Additionally, these stocks have cheap valuations based on a positive two-year average free cash flow yield, a relatively low price-to-economic book value ratio and a relatively low-growth appreciation period, which is the number of years the company can earn a positive economic profit margin on new projects.

Before revealing some of the stocks on our most attractive stocks report, let's look at the performance of our stocks from July's report (see "July's Most Attractive Stocks"). Fourteen of the stocks on our report from last month outperformed the S&P 500, which fell 4.8%.

And while the market was down overall for July, seven of our stocks actually had positive gains. Southern Copper, which rose 10.9%, was the large-cap leader for the month. Mueller Industries led the small-caps with a 6.2% gain.

Here are a three of the A+ large-cap stocks from August's most attractive stocks report:

Lexmark International is a new addition to our most attractive stocks for August. The company's stock price has taken a beating, decreasing nearly 20% since our July report, making the stock, in our opinion, more attractive. Though Wall Street clearly feels differently about LXK, it is among the few companies that actually has a rising return on invested capital (ROIC increased 6% in the last fiscal year) and positive economic earnings per share (a healthy $2.18).

Despite this positive news, the market undervalues Lexmark's shares. LXK has a 9.6% free cash flow yield. Strong economic profits will have LXK earning straight A's for investors.

Darden Restaurants is another new addition to our most attractive stocks for August. Based on new filing data, we believe that investors should be eating up shares of this company that operates chains such as Red Lobster and Olive Garden. The company has positive economic EPS of $1.66 and has increased ROIC by 1% in its last fiscal year.