Bill Gunderson's Radio Play of the Day: Meritage Homes

Tickers in this article: MTH

NEW YORK ( TheStreet) -- Zeroing in on a Best Stock Now begins with a leading asset class.

Equities are the best place to be in this fifth year of the bull market. Small- and mid-cap U.S. stocks, specifically, are the most attractive.

Here is my current ranking of asset classes:

Data from Best Stocks Now App

Once I have determined leading asset classes, I like to focus on the best sectors:

Data from Best Stocks Now App

The homebuilding and construction sector has been an outperformer for the past 12 months as the real estate rebound is real. I wrote about it last October, about midway through the surge. And the sector continues to hit new highs.

Now let's drill down further to find a leading stock.

Data from Best Stocks Now App

Meritage Homes (MTH) is headquartered in Scottsdale, Ariz. I just got back from a trip to Arizona to watch spring training. The Phoenix housing market, which was among the biggest busts in the financial meltdown, is recovering nicely. Scottsdale is a good place to be a homebuilder these days. And Meritage is a small-cap domestic stock. Bingo! Right asset class, right sector.

How has the stock performed over the years?

Data from Best Stocks Now App

Meritage Homes has handily outperformed the broader market over the past one, three, five and 10 years, as well as during the 2008 bear market.

When I compare Meritage to the other 3,287 stocks in my database, it earns a performance grade of "B+" and a momentum grade of "A."

Momentum and performance are nice, but I also require value. I don't like momentum alone, nor do I like pure value investing. Too many value traps out there. I like to combine momentum with value.

Let's take a look at the current valuation of the shares:

Data from Best Stocks Now App

The shares are currently trading at 15.2 times forward earnings. While I don't quite believe analysts' growth estimate of 58% per year, I would be happy with anything over 15%. That would create a PEG ratio under 1.0.

The valuation still looks reasonable to me.

Now that the stock passes the performance and the valuation test, am I ready to buy?

The stock must pass one more test. A visual check of a one-year chart:

I never buy stocks in downtrends. Sideways trends make me yawn. Topping out and rolling over trends are definitely taboo. This is a trend that should be sold.

Stocks that are in healthy uptrends and not too extended are my favorites. I especially like fresh, new breakouts.

That's it! Meritage passes my three rigorous tests.

If you would like to hear my analysis of this stock from my daily radio show click here .