I tried to create a growth stocks portfolio that can outperform the market by a big margin. The following strategy shows such promise. The method I used for this strategy is to screen all the stocks which are trading in the U.S. markets (except over-the-counter) according to certain criteria, and to choose the best 20 stocks. This procedure should be repeated each four weeks, and the demand is to replace the stocks that no longer comply with the screening requirement with other stocks that comply with the requirement. Back-tests' results of the following screen have shown much better returns during the last year, the last five years and the last fifteen years than the S&P 500 benchmark. Although the past guarantees nothing, it does provide insight into how this screen has performed under various economic conditions over varying time frames.
The screen's method that I used to build this portfolio requires all stocks to comply with all following demands:
- The stock does not trade over-the-counter (OTC).
- Trailing P/E is less than 20.
- Forward P/E is less than 15.
- Average annual earnings growth estimates for the next five years is greater than 15%.
- Total debt to equity is less than 1.0.
- Gross margin improved in the past year.
- Current ratio improved in the past year.
- Return on investment, five years average, is among the 35% highest in the market.
- The twenty stocks with the highest earnings growth prospects among all the stocks that complied with the first eight 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 September 28, 2013, I discovered the following twenty stocks:
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 twenty companies.
Tidewater Inc. (TDW)
Tidewater Inc. provides offshore service vessels and marine support services through the operation of a fleet of marine service vessels.
Tidewater has a trailing P/E of 19.53 and a low forward P/E of 13.13. The PEG ratio is extremely low at 0.43, and the average annual earnings growth estimates for the next five years is very high at 45.6%. The forward annual dividend yield is at 1.70%, and the payout ratio is only 33.3%. The annual rate of dividend growth over the past five years was quite high at 10.76%%
The TDW stock price is 2.79% above its 20-day simple moving average2.42% above its 50-day simple moving average and 12.17% above its 200-day simple moving average. That indicates a short-term, mid-term and long-term uptrend.
On August 06, Tidewater reported its first-quarter fiscal 2014 financial results, which missed EPS expectations by $0.09 and beat on revenues. The company reported first quarter net earnings for the period ended June 30, 2013, of $30.1 million, or $0.61 per common share, on revenues of $334.1 million. For the same quarter last year, net earnings were $32.9 million, or $0.65 per common share, on revenues of $294.4 million. The immediately preceding quarter ended March 31, 2013, had net earnings of $46.6 million, or $0.95 per common share, on revenues of $328.3 million.
Tidewater has compelling valuation metrics and very strong earnings growth prospects, and considering its good earnings growth prospects, and the fact that the stock is in an uptrend, TDW stock can move higher. Furthermore, the solid growing dividend represents a nice income.
Risks to the expected capital gain include a downturn in the U.S. economy, and decline in the price of oil and natural Gas.
PC Connection, Inc. (PCCC)
PC Connection, Inc. operates as a direct marketer of various information technology solutions.
PC Connection has no debt at all, and it has a very low trailing P/E of 11.85 and a very low forward P/E of 10.68. The PEG ratio is extremely low at 0.37, and the average annual earnings growth estimates for the next five years is very high at 25%. The price-to-cash ratio is low at 6.17, and the price-to-sales ratio is very low at 0.18.
PC Connection has recorded revenue and EPS growth during the last year, the last three years and the last five years, as shown in the table below.
On August 01, PC Connection reported its second-quarter financial results, which beat EPS expectations by $0.01. Net sales for the second quarter of 2013 were $557.3 million, an increase of 2.7% compared to $542.6 million for the second quarter of 2012. Net income for the quarter ended June 30, 2013 was $9.2 million, or $0.35 per share, compared to net income of $8.8 million, or $0.33 per share, for the corresponding prior year quarter.
PC Connection has recorded revenue and EPS growth, and it has compelling valuation metrics and very strong earnings growth prospects. In my opinion, PCCC stock can move higher.
Ensco plc (ESV)
Ensco plc provides offshore contract drilling services to the oil and gas industry worldwide.
Ensco has a low debt (total debt to equity is only 0.39), and it has a very low trailing P/E of 9.91 and a very low forward P/E of 7.34. The PEG ratio is very low at 0.59, and the average annual earnings growth estimates for the next five years is very high at 21.06%. The forward annual dividend yield is quite high at 3.67%, and the payout ratio is only 18.5%. The annual rate of dividend growth over the past five years was very high at 71.88%.
Ensco has recorded strong revenue and dividend growth during the last year, the last three years and the last five years, as shown in the table below.
On July 29, Ensco reported its second-quarter results, which beat EPS expectations by $0.06 and beat on revenues. In the report, Chairman, President and Chief Executive Officer Dan Rabun stated:
We continue to see strong, broad-based customer demand given the steady pace of new discoveries that must be appraised and developed. Based on our positive outlook, we recently ordered our eighth Samsung DP3 drillship, ENSCO DS-10, and our seventh Keppel FELS B Class jackup, ENSCO 110. These new assets reinforce our fleet standardization strategy that provides customers consistently high levels of operational excellence.
Ensco has recorded strong revenue and dividend growth, and considering its cheap valuation metrics and its strong earnings growth prospects, ESV stock can move higher. Furthermore, the rich growing dividend represents a nice income.
Risks to the expected capital gain and to the dividend payment include a downturn in the U.S. economy, and decline in the price of oil and natural gas.
In order to find out how such a screening formula would have performed during the last year, last 5 years and last 15 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 benchmark (S&P 500), 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.
One year back-test
Five years back-test
Fifteen years back-test
The growth stocks screen has given much better returns during the last year, the last five years and the last fifteen years than the S&P 500 benchmark. The Sharpe ratio, which measures the ratio of reward to risk, was also much better in all the three tests. One year return of the screen was very high at 42.17%, while the return of the S&P 500 index during the same period was at 16.82%.
The difference between the growth screen to the benchmark was even more noticeable in the 15 years back-test. The 15-year average annual return of the screen was at 19.30%, while the average annual return of the S&P 500 index during the same period was only 2.19%. The maximum drawdown of the screen was at 68.96%, while that of the S&P 500 was at 65.01%.
Although this screening system has given superior results, I recommend readers use this list of stocks as a basis for further research.