Back in 1995, Yahoo Inc. (YHOO) was a struggling dot-com startup with just $1.4 million in annual revenues. At that point in time, the vast majority of Americans were still unfamiliar with the Internet. In addition, most investors were skeptical about whether any pure-play dot-com firm would ever manage to earn a profit. Because of this, the risks associated with an investment in Yahoo, as well as most other Internet-related firms, were extremely high. Wall Street had yet to catch on to the company's long-term potential, and not surprisingly, the stock languished in the roughly $2-3 range (on a split-adjusted basis) throughout much of the mid-1990s.

Behind the scenes, however, Yahoo's management team was working hard to build the firm's presence in the booming online market. And as the firm's revenue base and the online advertising industry continued to grow in the subsequent years, it eventually moved toward profitability. By the time 1998 rolled around, Yahoo had figured out a way to earn steady profits. Not surprisingly, investor interest in the company exploded and the firm's stock price followed suit.

Here's a look at what happened to Yahoo's share price as the firm moved toward profitability in the late 1990s:

The table below clearly demonstrates how Wall Street responded as Yahoo began to post steady profits. Note how the stock started its meteoric rise at roughly the same time the firm began to deliver solid net income:

If you've been investing for quite awhile, then this pattern probably isn't new to you. After all, we could come up with literally hundreds of additional examples of stocks that have followed the exact same path. Just think of all of the tremendous success stories we've seen in recent years with companies such as Genentech (DNA -- reached steady profits in 2003), Panera (PNRA -- 2000), and Amazon.com (AMZN -- 2003), among others.

The bottom line is that most investors wait until a firm reaches profitability before they place their hard-earned money into the company's stock. Because of this, stocks tend to post their most dramatic upswings as the underlying company moves from the red into the black.

With the above analysis as a backdrop, in a recent Market Advisor issue my staff and I decided to go "inside the numbers" in search of companies that have just turned the corner to profitability. Such firms often see a huge surge in buying interest in their stocks as they finally start to deliver real earnings. With that tremendous potential in mind, we recently searched through our universe of 10,000 stocks to find companies that met the following criteria:

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1.  Net income of less than zero (in other words, a net loss) in each of the past three fiscal years
2.  Positive net income and positive cash flow in the trailing 12-month period
3.  Revenue growth of greater than +30% in the most recent one- and three-year periods
4.  12-month share price return of greater than +30%

My goal was to come up with a list of firms that have posted a net loss in each of the last three years, but have now turned the corner to profitability. In addition, I looked for firms with positive cash flow, strong revenue growth and a solid share price performance in the most recent 12-month period. After running this data through StreetAuthority's advanced scanning software, I came up with the following list of companies:

After having my research staff take a closer fundamental look at each of the above firms, we came to the conclusion that Altiris (ATRS), Caraco Pharmaceuticals (CPD), Dawson Geophysical (DWSN) and Sohu.com (SOHU) are all worth a closer look. As always, however, please make sure to do your own due diligence on each of these firms to decide if they are right for your portfolio. Any and all final investing decisions for your own account are entirely up to you.

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