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I tried to create a growth stocks portfolio that can outperform the market by a big margin. The following screen shows such promise. I have searched for companies that are included in the Russell 3000 index that have strong growth prospects and their gross margin and current ratio have improved in the past year. Those stocks also would have to show low debt.

The screen's method that I used to build this portfolio requires all stocks to comply with all following demands:

  1. The stock is included in the Russell 3000 index.
  2. The stock does not trade over-the-counter [OTC].
  3. Trailing P/E is less than 20.
  4. Forward P/E is less than 15.
  5. Average annual earnings growth estimates for the next five years is greater than 15%.
  6. Total debt to equity is less than 1.0.
  7. Gross margin improved in the past year.
  8. Current ratio improved in the past year.
  9. Return on investment, five years average, is among the 35% highest in the market.
  10. The eight stocks with the highest quick rank among all the stocks that complied with the first nine demands.

I used the Portfolio123's powerful screener to perform the search and to run back-tests. Nonetheless, the screening method should only serve as a basis for further research. All the data for this article were taken from Yahoo Finance, finviz.com and Portfolio123.

After running this screen on July 31, 2013, before the market open, I discovered the following eight stocks:

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The table below presents the trailing P/E, the forward P/E, the average annual earnings growth estimates for the next five years, the growth margin, the current ratio, and the total debt to equity for the eight companies.

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Kulicke and Soffa Industries Inc (NASDAQ:KLIC)

Kulicke and Soffa Industries, Inc. designs, manufactures, and sells capital equipment and expendable tools to assemble semiconductor devices.

Kulicke and Soffa has no debt at all, and it has $6.63 a share in net cash. The trailing P/E is very low at 5.88 and the forward P/E is also very low at 7.18. The PEG ratio is extremely low at 0.45, and the average annual earnings growth estimates for the next five years is very high at 15.7%.

The KLIC stock price is 4.80% above its 20-day simple moving average, 2.65% above its 50-day simple moving average and 5.02% above its 200-day simple moving average. That indicates a short-term, mid-term and long-term uptrend.

On July 30, Kulicke and Soffa announced its fiscal third quarter 2013 results, which beat EPS expectations by $0.11 and beat on revenues.

Third-Quarter Fiscal 2013 Financial Highlights

  • Net revenue of $141.2 million.
  • Gross margin of 46.7%.
  • Net income was $18.9 million or $0.25 per share.
  • Cash and cash equivalents were $508.5 million as at June 29, 2013.

In the report, Bruno Guilmart, Kulicke & Soffa's President and Chief Executive Officer, said:

Revenue for the third fiscal quarter exceeded the high end of our guidance range. This sequential growth reflects a higher proportion of sales to our top 5 customers, along with a broader recovery of the sector. We are encouraged by our ability to maintain our cost structure while also maintaining our gross margins at 46.7%, above our trailing 3 year average of 46.0%. This reflects our brand premium and technology leadership in the market place, and also our highly responsive, scalable operating model.

The compelling valuation metrics, the very good third quarter results, the fact that the company is rich in cash and has no debt, and the fact that the stock is in an uptrend are all factors that make KLIC stock very attractive.

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Source: Portfolio123

Geospace Technologies Corp (NASDAQ:GEOS)

Geospace Technologies Corporation designs and manufactures instruments and equipment used in the acquisition and processing of seismic data.

Geospace Technologies has no debt at all, and it has a trailing P/E of 17.81 and a very low forward P/E of 10.98. The PEG ratio is extremely low at 0.48, and the average annual earnings growth estimates for the next five years is very high at 20%.

GEOS will report its latest quarterly financial results on July 30. GEOS is expected to post a profit of $1.17 a share, a 39% rise from the company's actual earnings for the same quarter a year ago.

All these factors - the very low multiples, and the strong earnings growth prospects -- make GEOS stock quite attractive.

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Chart: finviz.com

PhotoMedex Inc (NASDAQ:PHMD)

PhotoMedex, Inc., a skin health company, provides integrated disease management and aesthetic solutions to dermatologists, professional aestheticians, and consumers in North America, the Asia Pacific, Europe, and South America.

PhotoMedex has no debt at all, and it has a very low trailing P/E of 13.66 and a very low forward P/E of 9.68. The PEG ratio is very low at 0.69, and the average annual earnings growth estimates for the next five years is very high at 17.5%.

PHMD will report its latest quarterly financial results on August 05. PHMD is expected to post a profit of $0.34 a share, a 70% rise from the company's actual earnings for the same quarter a year ago.

All these factors - the very low multiples, and the strong earnings growth prospects -- make PHMD stock quite attractive.

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Chart: finviz.com

Female Health Co (NASDAQ:FHCO)

The Female Health Company engages in the development, manufacture, marketing, and sale of consumer health care products.

Female Health has no debt at all, and it has a low trailing P/E of 14.71 and a very low forward P/E of 12.42. The average annual earnings growth estimates for the next five years is very high at 23%. The forward annual dividend yield is quite high at 3.06%, and the payout ratio is only 40%.

FHCO will report its latest quarterly financial results on August 01. FHCO is expected to post a profit of $0.08.

All these factors - the very low multiples, the rich dividend, and the strong earnings growth prospects -- make FHCO stock quite attractive.

(click to enlarge)

Chart: finviz.com

Bio Reference Laboratories Inc (NASDAQ:BRLI)

Bio-Reference Laboratories, Inc. provides clinical laboratory testing services for the detection, diagnosis, evaluation, monitoring, and treatment of diseases primarily in the greater New York metropolitan area.

Bio-Reference Laboratories has a very low debt (total debt to equity is only 0.11), and it has a trailing P/E of 16.17 and a low forward P/E of 12.92. The PEG ratio is very low at 0.95, and the average annual earnings growth estimates for the next five years is very high at 17.25%.

BRLI will report its latest quarterly financial results on August 29. BRLI is expected to post a profit of $0.51 a share, a 13.3% rise from the company's actual earnings for the same quarter a year ago.

All these factors - the very low multiples, and the strong earnings growth prospects -- make BRLI stock quite attractive.

(click to enlarge)

Chart: finviz.com

American Public Education Inc (NASDAQ:APEI)

American Public Education, Inc., together with its subsidiary, American Public University System, Inc., provides online higher education focusing on the needs of the military and public service communities.

American Public Education has no debt at all, and it has a trailing P/E of 15.96 and a low forward P/E of 13.60. The PEG ratio is quite low at 1.02, and the average annual earnings growth estimates for the next five years is very high at 16.75%.

APEI will report its latest quarterly financial results on August 08. APEI is expected to post a profit of $0.58 a share, a 14% rise from the company's actual earnings for the same quarter a year ago.

All these factors - the very low multiples, and the strong earnings growth prospects -- make APEI stock quite attractive.

(click to enlarge)

Chart: finviz.com

Abercrombie & Fitch Co. (NYSE:ANF)

Abercrombie & Fitch Co., through its subsidiaries, operates as a specialty retailer of casual apparel for men, women, and kids.

Abercrombie & Fitch has a very low debt (total debt to equity is only 0.12) and it has a trailing P/E of 15.88 and a very low forward P/E of 12.35. The PEG ratio is quite low at 1.10, and the average annual earnings growth estimates for the next five years is very high at 18.13%. The forward annual dividend yield is at 1.61%, and the payout ratio is only 25.5%.

The ANF stock price is 0.49% above its 20-day simple moving average, 0.78% above its 50-day simple moving average and 7.71% above its 200-day simple moving average. That indicates a short-term, mid-term and long-term uptrend.

ANF will report its latest quarterly financial results on August 12. ANF is expected to post a profit of $0.31 a share, a 55% rise from the company's actual earnings for the same quarter a year ago.

All these factors - the very low multiples, the strong earnings growth prospects, and the fact that the stock is in an uptrend -- make ANF stock quite attractive.

(click to enlarge)

Chart: finviz.com

Argan Inc (NYSE:AGX)

Argan, Inc., through its subsidiaries, provides development, consulting, engineering, procurement, construction, commissioning, operations, and maintenance services to the power generation and renewable energy markets.

Argan has no debt at all, and it has $12.12 a share in net cash. The trailing P/E is very low at 8.95 and the forward P/E is also very low at 11.13. The average annual earnings growth estimates for the next five years is very high at 16%.

The compelling valuation metrics, the strong earnings growth prospects, and the fact that the company is rich in cash and has no debt, are all factors that make AGX stock quite attractive.

(click to enlarge)

Chart: finviz.com

Back-testing

In order to find out how such a screening formula would have performed during the last year, last five years and last 14 years, I ran the back-tests, which are available by the Portfolio123's screener.

The back-test takes into account running the screen every four weeks and replacing the stocks that no longer comply with the screening requirement with other stocks that comply with the requirement. The theoretical return is calculated in comparison to the benchmarks (S&P 500, Russell 3000), considering 0.25% slippage for each trade and 1.5% annual carry cost (broker cost). The back-tests results are shown in the charts and the tables below.

Since some readers could not get the same results that I got in some of my previous posts, I am giving, in the charts below, the Portfolio123 exact codes which I used for building this screen and the back-tests. The number of stocks left after each demand can also be seen in the chart.

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One-year back-test

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Five-year back-test

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14-year back-test

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Summary

The growth screen has given much better returns during the last year, the last five years and the last 14 years than the S&P 500 and the Russell 3000 benchmarks. The Sharpe ratio, which measures the ratio of reward to risk, was also much better in the five years and the fourteen years test. One year return of the screen was at 33.31%, while the return of the S&P 500 index during the same period was at 21.67% and that of the Russell 3000 index was at 23.50%.

The difference between the growth screen to the benchmarks was even more noticeable in the 14 years back-test. The 14-year average annual return of the screen was at 20.87%, while the average annual return of the S&P 500 index during the same period was only 2.19% and that of the Russell 3000 index was at 2.89%. The maximum drawdown of the screen was at 62.65%, while that of the S&P 500 was at 56.39% and the maximum drawdown of the Russell 3000 index was at 57.07%.

Although this screening system has given superior results, I recommend readers use this list of stocks as a basis for further research.

Disclosure: I am long KLIC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.