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I tried to create a growth stocks portfolio consists of ten stocks that can outperform the market by a big margin. The following screen shows such promise. I have searched for highly profitable companies that have strong earnings growth prospects and their gross margins 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 does not trade over-the-counter (OTC).
  2. Market cap is greater than $100 million.
  3. Price is greater than 1.00.
  4. Trailing P/E is less than 20.
  5. Forward P/E is less than 15.
  6. Average annual earnings growth for the last five years is greater than 10%.
  7. Average annual earnings growth estimates for the next five years is greater than 15%.
  8. Total debt to equity is less than 1.0.
  9. Gross margin improved in the past year.
  10. The ten stocks with the best "Momentum Value" ranking among all the stocks that complied with the first nine demands.

A Ranking system sorts stocks from best to worst based on a set of weighted factors. Portfolio123 has a powerful ranking system which allows the user to create complex formulas according to many different criteria. They also have highly useful several groups of pre-built ranking systems, I used one of them the "Momentum Value" for this screen.

The "Momentum Value" ranking system is quite complex, and it is taking into account dividend yield, trailing P/E, price-to-book ratio, price-to-sales ratio, return on equity, sales growth and price momentum, as shown in the Portfolio123's chart below.

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 November 10, 2013, I discovered the following ten stocks:


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


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NN Inc. (NASDAQ:NNBR)

NN, Inc. engages in the manufacture and sale of metal bearing, plastic and rubber, and precision metal components for bearing manufacturers worldwide.


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Source: Company Presentation

NN, Inc. has a very low debt (total debt to equity is 0.27), and it has a low trailing P/E of 14.39 and a very low forward P/E of 13.35. The PEG ratio is low at 1.01, and the average annual earnings growth estimates for the next five years is quite high at 15.70%. The price-to-sales ratio is very low at 0.84, and the price to free cash flow is very low at 14%. The forward annual dividend yield is at 1.37%, and the payout ratio is only 5.4%.

The NNBR stock price is 6.97% above its 20-day simple moving average, 12.28% above its 50-day simple moving average and 51.85% above its 200-day simple moving average. That indicates a short-term, a mid-term and a long-term uptrend.

Analysts recommend the stock. Among the two analysts covering the stock, one rates it as a strong buy, and one rates it as a buy.

NN, Inc. has recorded strong EPS and revenue growth during the last three, as shown in the charts below.


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Source: Company Presentation

The table below emphasizes the NN, Inc 's superior stock valuation over the industry median, the sector median and the S&P 500 median.


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Source: Portfolio123

The chart below emphasizes NN, Inc 's strong market share positions in core metal bearing components.


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Source: Company Presentation

On November 06, NN Inc. reported its third-quarter financial results. EPS came in at $0.29 in-line with analyst expectations. Net sales for the third quarter of 2013 were $93.0 million, an increase of $6.4 million or 7.4% compared to net sales of $86.6 million for the third quarter of 2012. Net income for the third quarter was $5.1 million, or $0.29 per diluted share compared to $3.1 million, or $0.18 per diluted share for the same period last year.

NN Inc. has compelling valuation metrics and strong earnings growth prospects, and considering the fact that the stock is in an uptrend, NNBR stock can move higher. Furthermore, the solid dividend represents a nice income.


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Chart: finviz.com

Rock-Tenn Company (NYSE:RKT)

Rock-Tenn Company manufactures and sells corrugated and consumer packaging products in the United States, Canada, Mexico, Chile, Argentina, Puerto Rico, and China.

Rock-Tenn Company has a very low trailing P/E of 9.64 and a very low forward P/E of 9.79. The PEG ratio is extremely low at 0.62, and the average annual earnings growth estimates for the next five years is quite high at 15.77%. The price-to-sales ratio is very low at 0.73. The forward annual dividend yield is at 1.46%, and the payout ratio is only 10.8%.

Rock-Tenn Company has recorded strong revenue, earnings and dividend growth during the last year, the last three years and the last five years, as shown in the table below.

The tables below emphasize the Rock-Tenn's superior growth rates and return on capital over the industry median, the sector median and the S&P 500 median.


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Source: Portfolio123

On November 04, Rock-Tenn Company reported its fourth-quarter fiscal 2013 financial results, which beat EPS expectations by $0.20 and missed on revenues. The company reported earnings for the quarter ended September 30, 2013 of $2.40 per diluted share and adjusted earnings of $2.66 per diluted share. Adjusted earnings per diluted share increased 91% over the prior year quarter. Net sales of $2,485 million for the fourth quarter of fiscal 2013 increased $131 million compared to the fourth quarter of fiscal 2012.

Rock-Tenn Company has recorded strong revenue, earnings and dividend growth, and it has compelling valuation metrics and strong earnings growth prospects. In my opinion, RKT stock can move higher. Furthermore, the solid dividend represents a nice income.


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Chart: finviz.com

Whiting Petroleum Corp. (NYSE:WLL)

Whiting Petroleum Corporation, an independent oil and gas company, engages in the acquisition, exploration, exploitation, development, and production of crude oil, natural gas liquids, and natural gas in the United States.


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Source: Company Presentation

Whiting Petroleum has a trailing P/E of 15.13 and a low forward P/E of 14.43. The price-to-cash ratio is low at 7.46, and the average annual earnings growth estimates for the next five years is very high at 16.61%.

Analysts recommend the stock. Among the 34 analysts covering the stock; nine rate it as a strong buy, seventeen rate it as a buy and eight rate it as a hold.

Whiting Petroleum 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.

The tables below emphasize the Whiting Petroleum's superior growth rates and margins over the industry median, the sector median and the S&P 500 median.


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On October 23, Whiting Petroleum reported its third-quarter financial results. EPS came in at $0.1.28 a $0.18 better than analyst expectations, the company beat also expectations on revenues. In the report, James J. Volker, Whiting's Chairman and CEO, commented:

This is an exciting time for Whiting and our shareholders. During the third quarter, we added 17,282 net acres to our Hidden Bench and Missouri Breaks prospect areas and 32,419 net acres to our Redtail Niobrara prospect. Our new completion design using cemented liners and plug and perf technology is working throughout the Williston Basin. Initial results from our higher density drilling program at our Pronghorn prospect are very encouraging, and we expect results from our Sanish field and Hidden Bench prospect higher density drilling programs in the fourth quarter. We expect to add a third rig at our Redtail Niobrara prospect on November 4, 2013 and are in development mode with an estimated 3,394 future gross well locations.

Whiting Petroleum has recorded strong revenue and EPS growth, and it has good valuation metrics and very strong earnings growth prospects. In my opinion, WLL stock can move higher.

Risks to the expected capital gain include; a downturn in the U.S. economy, and a decline in the price of oil and natural gas.


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Chart: finviz.com

Back-testing

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. I am also giving a table which readers can use to copy and paste codes directly into the Portfolio123's screener.


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Universe(NOOTC)=TRUE

MktCap > 100

Close(0)> 1

PEExclXorTTM <20

ProjPENextFY <15

EPS5YCGr% >10

LTGrthRtMean >15

DbtTot2EqQ <1

GMgn%TTM > GMgn%PTM

One year back-test


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Five years back-test


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Fifteen years back-test


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Summary

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 exceptionally high at 61.67%, while the return of the S&P 500 index during the same period was at 26.81%.

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 11.08%, while the average annual return of the S&P 500 index during the same period was only 2.49%. The maximum drawdown of the screen was at 65.03%, 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.

Source: Creating A Small Growth Stocks Portfolio That Has Outperformed The Market