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Picking stocks based on key fundamental ratios and analyst ratings can help investors narrow down on good quality stocks.

Consider this set of criteria in selecting High Growth stocks with attractive valuations and Buy ratings.

EPS - Trend is your friend

When looking at Earnings Per Share or EPS, the trend is your friend - using EPS performance over a period of time helps remove any outlier events that caused a negative or positive surprise at one time.

  1. EPS Growth (Est. Next Year vs. This Year) >= 15%

    This indicator determines how quickly the company will grow going into the next year. A value greater than 15% is a good growth rate to look for.

  2. EPS Growth (Est. This Year vs. Last Year) >= 15%

    This indicator can be used to determine how the company have grown so far, compared to previous year.

  3. Next Year's P/E Estimate < = 13

    P/E ratio compares the stock price to its EPS. A stock with high P/E ratio indicates that the market is ready to pay higher amount for each unit of earning. This ratio can be determined over a period of time (e.g. projected next year) to analyze less covered stocks.

    This indicator shows the analysts' P/E expectation for the next year. A value of less than or equal to 13 is reasonably low and one can argue that it is relatively less covered by analysts so far. This can be a big plus especially because one can get early entry before the stock becomes too hot. Note that a low value does not always indicate a low coverage stock.

  4. The Forward EPS Long Term Growth (3-5 years) represents how operating earnings are expected to increase over the next complete business cycle.

    In order to select a stock with a realistically positive projected growth trend that is sustainable, Forward EPS Long Term Growth Rate between 15% to 30% is a good range.

    Note that if the Forward EPS Long Term Growth rate is too high, such a growth might not be sustainable.

  5. EPS Growth in Trailing Twelve Months vs. Prior Trailing Twelve Months >= 15

    This indicator represent the most recent full-year picture of earnings using actual numbers as opposed to estimates and helps remove any negative surprises in the past twelve months.

  6. First Call Consensus recommendations between 2.5 to 1.0

    First Call is a company that gathers earnings estimates and stock ratings from brokerage analysts. A First Call Estimate of 2.5 to 1.0 indicates that the stock has either a consensus Buy or Strong Buy rating. Using this criteria in stock selection helps in picking a stock with favorable fundamental outlook.

Results

Using the above six criteria on the close of July 16 2012, one can narrow down on the following selections.

1. The Manitowoc Company Inc. (NYSE:MTW)

MTW is a leading provider of cranes and commercial foodservice
equipment.

  • Price*: $10.88
  • 52-week range: $5.76-$16.97
  • EPS Growth (Est. Next Year vs. This Year): 83%
  • EPS Growth (Est. This Year vs. Last Year): 108%
  • Next Year's P/E Estimate: 7.6
  • Forward EPS Long Term Growth (3-5 years): 15%
  • EPS Growth (TTM vs. Prior TTM): 175%
  • First Call Consensus recommendations: Buy
  • Risks: Sustained sluggish growth, liquidity issues and less demand for end market equipment products.

2. Textron Inc. (NYSE:TXT)

Textron is an aerospace and industrial conglomerate that makes Cessna business jets, Bell helicopters, and industrial and military equipment and components. It also operates a diversified commercial finance company.

  • Price*: $22.97
  • 52-week range: $14.66 - $29.18
  • EPS Growth (Est. Next Year vs. This Year): 17.6%
  • EPS Growth (Est. This Year vs. Last Year): 49%
  • Next Year's P/E Estimate: 10.5
  • Forward EPS Long Term Growth (3-5 years): 31.2%
  • EPS Growth (TTM vs. Prior TTM): 173%
  • First Call Consensus recommendations: Buy
  • Risks: Sluggish global growth, reduced demand of jets or helicopters, reduced military spending and loan losses in finance segment.

3. Apple Inc. (NASDAQ:AAPL)

This company does not need any introduction.

  • Price*: $606.91
  • 52-week range: $353.02 - $644.00
  • EPS Growth (Est. Next Year vs. This Year): 15.7%
  • EPS Growth (Est. This Year vs. Last Year): 69.2%
  • Next Year's P/E Estimate: 11.3
  • Forward EPS Long Term Growth (3-5 years):
  • EPS Growth (TTM vs. Prior TTM): 95.5%
  • First Call Consensus recommendations: Buy
  • Risks: Pricing pressures stemming from competitors, weaker global demand, loss of market share to competitors, and failure to roll out new products on time.

4. Caterpillar Inc. (NYSE:CAT)

CAT is the world's largest producer of earthmoving equipment, and manufacturer of electric power generators and engines used in petroleum markets, and mining equipment.

  • Price*: $81.15
  • 52-week range: $67.54 - $116.95
  • EPS Growth (Est. Next Year vs. This Year): 15.9%
  • EPS Growth (Est. This Year vs. Last Year): 30.7%
  • Next Year's P/E Estimate: 7.4
  • Forward EPS Long Term Growth (3-5 years): 17.5%
  • EPS Growth (TTM vs. Prior TTM): 40.9%
  • First Call Consensus recommendations: Buy
  • Risks: Sluggish global growth, supply chain disruptions, high material costs and integration issues with recent acquisitions.

5. Chicago Bridge & Iron Co. NV (NYSE:CBI)

CBI is a global specialty engineering, procurement and construction company serving customers in the energy sector.

  • Price*: $37.12
  • 52-week range: $23.88 - $47.74
  • EPS Growth (Est. Next Year vs. This Year): 17.3%
  • EPS Growth (Est. This Year vs. Last Year): 15
  • Next Year's P/E Estimate: 10.8
  • Forward EPS Long Term Growth (3-5 years): 16.9%
  • EPS Growth (TTM vs. Prior TTM): 24.53%
  • First Call Consensus recommendations: Buy
  • Risks: Higher labor costs, a stronger US Dollar, low oil prices and a decline in the number of projects due to bad weather or slowdown in energy construction spending.

*Price as of close on 07/16/2012

Conclusion

As most of you may have noticed, except for Apple, all other companies that got selected using the criteria are in the Industrial sector.

Investors must be careful in buying more than one stock belonging to the same sector in their portfolio, and understand the mentioned risks associated with the sector as well as the company while keeping the macro economic environment in mind.

Source: Top 5 High-Growth Stocks With Buy Or Better Ratings