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 very profitable companies that have strong earnings 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:
- The stock does not trade over-the-counter (OTC).
- Market cap is greater than $100 million.
- Price is greater than 1.00.
- 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 ten 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 October 13, 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.
Rowan Companies plc (NYSE:RDC)
Rowan Companies plc provides offshore oil and gas contract drilling services.
Source: Company Presentation
Rowan Companies has a trailing P/E of 18.46 and a very low forward P/E of 10.39. The PEG ratio is very low at 0.68, and the average annual earnings growth estimates for the next five years is very high at 27.10%. The current ratio is very high at 6.20, and the price to book value is very low at 0.97.
The RDC stock price is 1.07% above its 50-day simple moving average and 6.31% above its 200-day simple moving average. That indicates a mid-term and long-term uptrend.
Rowan's consensus EPS growth is much better than that of its peers, as shown in the chart below.
Source: Company Presentation
The tables below emphasize the Rowan's superior margins and stock valuation over the industry median, the sector median and the S&P 500 median.
The chart below emphasizes the fact that deepwater demand is fundamentally strong.
Source: Company Presentation
Rowan Companies will report its latest quarterly financial results on November 05. RDC is expected to post a profit of $0.44 a share, a 13% rise from the company's actual earnings for the same quarter a year ago.
Rowan Companies has compelling valuation metrics and very strong earnings growth prospects, and considering the fact that the stock is trading below book value, and it is in an uptrend, RDC stock can move much higher.
Risks to the expected capital gain include a downturn in the U.S. economy, and decline in the price of oil and natural gas.
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 19.05 and a forward P/E of 15.36. The PEG ratio is extremely low at 0.51, and the average annual earnings growth estimates for the next five years is very high at 37%.
The GEOS stock price is 9.05% above its 20-day simple moving average, 17.49% above its 50-day simple moving average and 3.52% above its 200-day simple moving average. That indicates a short-term, mid-term and long-term uptrend.
Analysts recommend the stock. Among the seven analysts covering the stock; three rate it as a strong buy, two rate it as a buy and two rate it as a hold.
Geospace Technologies has recorded consistent profitability and earnings growth during the last year, the last three years and the last five years, as shown in the chart below.
Source: Company Presentation
Geospace Technologies will report its latest quarterly financial results in November. GEOS is expected to post a profit of $1.06 a share, a 221% rise from the company's actual earnings for the same quarter a year ago.
On August 06, Geospace Technologies reported its third-quarter fiscal 2013 financial results, which beat EPS expectations by $0.20 and beat on revenues. The company reported net income of $17.0 million, or $1.31 per diluted share, on revenues of $78.1 million for its fiscal quarter ended June 30, 2013. This compares with a net income of $10.7 million, or $0.83 per diluted share, on revenues of $55.2 million for the comparable quarter last year.
Geospace Technologies has recorded good revenue and EPS growth and it has compelling valuation metrics and very strong earnings growth prospects. Considering Geospace Technologies' ability to increase production output on drilling projects and the high cost of oil exploration, the growing demand for the company services should continue. In my opinion, an investor in GEOS stock can expect a significant capital gain.
Risks to the expected capital gain include a downturn in the U.S. economy, and decline in the price of oil and natural Gas.
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 11.99 and a very low forward P/E of 10.74. The PEG ratio is very low at 0.63, and the average annual earnings growth estimates for the next five years is very high at 19.05%. The price-to-cash ratio is low at 5.13, and the price to free cash flow for the trailing 12 months is very low at 12.10.
Analysts recommend the stock. Among the seven analysts covering the stock; four rate it as a strong buy and three rate it as a buy.
PhotoMedex has recorded very strong revenue and EPS growth during the last year, the last three years and the last five years, as shown in the table below.
PhotoMedex will report its latest quarterly financial results on November 04. PHMD is expected to post a profit of $0.32 a share, a $0.03 decline from the company's actual earnings for the same quarter a year ago.
On August 07, PhotoMedex reported its second-quarter financial results, EPS came in at $0.34 in-line with expectations. In the report, the company announced that its Board of Directors authorized the expansion of its share repurchase program by a further $30 million. The company commented about this decision:
The expansion of our share repurchase program by a further $30 million is reflective of the confidence we have in the growth of PhotoMedex, our ability to generate free cash flow and our commitment to building shareholder value.
PhotoMedex has recorded strong revenue and EPS growth, and it has compelling valuation metrics and very strong earnings growth prospects. Since the company is highly profitable, and it is expanding its share repurchasing program, a higher price for PHMD stock can be expected.
Risks to the expected capital gain include; a downturn in the U.S. economy, and decline in the acceptance of its products.
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 39.71%, while the return of the S&P 500 index during the same period was at 18.43%.
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 14.72%, while the average annual return of the S&P 500 index during the same period was only 2.23%. The maximum drawdown of the screen was at 70.99%, while that of the S&P 500 was at 57%.
Although this screening system has given superior results, I recommend readers use this list of stocks as a basis for further research.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in RDC over the next 72 hours. 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.