I searched for very profitable stocks with strong growth prospects. These stocks would have to show stable financial conditions and generate positive free cash flow. However, in order to find the proper moment to open a position, a technical analysis with a momentum indicator can be of great assistance for investors.
I have elaborated a screening method, which shows stock candidates following these lines. Nonetheless, the screening method should only serve as a basis for further research.
The screen's formula requires all stocks to comply with all following demands:
The stock is included in the Russell 3000 index. Russell Investment explanation:
The Russell 3000 Index measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market. The Russell 3000 Index is constructed to provide a comprehensive, unbiased, and stable barometer of the broad market and is completely reconstituted annually to ensure new and growing equities are reflected.
Average annual earnings growth for the past 5 years was greater than 15%.
Average annual earnings growth estimates for the next 5 years is greater than 15%.
Average annual book value growth for the past 5 years was greater than 10%.
Price to free cash flow is positive, (many investors prefer using free cash flow instead of net income to measure a company's financial performance, because free cash flow is more difficult to manipulate. Free cash flow is the operating cash flow minus capital expenditure).
Debt to equity is less than 0.40.
The PEG ratio is less than 1.00.
The 10-day moving average is above 20-day moving average, and the crossover happened 2 days or less prior to the start of the screen (Short-term momentum indicator).
I used Portfolio123's powerful free screener to perform the search on December 08, obtaining the following three stocks as a result:
|Company||Symbol||Last price||Market Cap ($millions)||Trailing P/E||Forward P/E||PEG Ratio|
|Acacia Research Corporation|
|Portfolio Recovery Associates||PRAA||100.31||1,690||14.67||11.40||0.98|
Acacia Research Corporation (ACTG)
Acacia Research Corporation, through its subsidiaries, acquires, develops, licenses, and enforces patented technologies in the United States.
Acacia Research has no debt at all and it has a forward P/E of 18.71 and a very low PEG ratio of 0.67. The current ratio is very high at 11.37. The average annual earnings growth for the past 5 years was extremely high at 113.90% and the average annual earnings growth estimates for the next 5 years is also very high at 38%. The company is trading 44.7% below its 52-week high and has 67% upside potential based on the consensus mean target price of $41.63. Analysts recommend the stock, among the five analysts covering the stock, one rates it as a strong buy, three rate it as a buy and one rates it as a hold. On November 16, Acacia Research announced (here) that the company's board has authorized a program for repurchases of shares of the company's outstanding common stock. The stock repurchase program will be put into effect immediately. Under the stock repurchase program, the company is authorized to purchase in the aggregate up to $100M of its common stock through the period ending May 15, 2013. The compelling valuation metrics, the strong growth prospects, the analyst's recommendation and the buy back program; all these factors make the ACTG stock very attractive.
(click to enlarge)
Portfolio Recovery Associates Inc. (PRAA)
Portfolio Recovery Associates, Inc., a financial and business service company, engages in the purchase, collection, and management of portfolios of defaulted consumer receivables.
Portfolio Recovery Associates has a very low debt (total debt to equity is only 0.37) and it has a low trailing P/E of 14.67 and a low forward P/E of 11.40, the PEG ratio is very low at 0.98. The price to free cash flow for the trailing 12 months is very low at 12.70. The average annual earnings growth for the past 5 years was quite high at 16.16% and the average annual earnings growth estimates for the next 5 years is also high at 15%. Analysts recommend the stock, among the five analysts covering the stock, three rate it as a strong buy and two rate it as a buy. On October 30, Portfolio Recovery reported its 3Q financial results (here), PRAA beat estimates on both top and bottom lines.
Third Quarter Highlights:
Cash collections of $229 million, up 26% from the third quarter of 2011.
Revenue of $151 million, up 32% from the year-earlier quarter.
Net income of $33 million, an increase of 31% over the third quarter of 2011.
Diluted EPS of $1.96, compared with $1.48 in the third quarter.
The cheap valuation, the strong growth prospects, the analyst's recommendation and the impressive 3Q financial results; all these factors make the PRAA stock quite attractive.
Zix Corporation (ZIXI)
Zix Corporation provides email encryption solutions in software as a service model in the United States.
Zix Corporation has no debt at all and it has a very low trailing P/E of 8.00 and a low forward P/E of 12.95, the PEG ratio is extremely low at 0.40. The price to free cash flow for the trailing 12 months is very low at 12.59. The average annual earnings growth for the past 5 years was extremely high at 50.83% and the average annual earnings growth estimates for the next 5 years is also very high at 20%. The company is trading 20.2% below its 52-week high and has 65% upside potential based on the consensus mean target price of $4.58. Analysts recommend the stock, among the four analysts covering the stock, one rates it as a strong buy and three rate it as a buy. On October 23, Portfolio Recovery reported its 3Q financial results (here), ZIXI beat estimates on revenues and was in-line on EPS.
Third Quarter 2012 Financial Highlights:
Third quarter new first year orders of $2.6 million, including a one-time catch up of approximately $300,000.
New first year orders for the nine months ended September 30, 2012, were $6.8 million compared to $5.2 million for the same period last year, representing 31.0% year-over-year growth.
Third quarter revenue of $11.0 million, an increase of 15.3%, year-over-year, the company's 15th consecutive quarterly record in revenue.
Third quarter GAAP net income of $0.03 per share, a decrease of 18.9%, year-over-year.
Third quarter Non-GAAP net income of $0.04 per share, an increase of 3.6%, year-over-year.
The company generated approximately $4.6 million in cash flow from operations, a decrease of $0.1 million, year-over-year.
Cash and cash equivalents totaled $23.0 million, an increase of $4.2 million compared to the June 30, 2012, ending cash balance.
The cheap valuation, the strong growth prospects, the analyst's recommendation and the positive 3Q financial results; all these factors make the ZIXI stock quite attractive.