In my previous post here, I introduced a screening method looking for small-cap value stocks. In this article I will show a screening method for growth stocks from the small-cap universe, which obtain a better chance to outperform the market. Since small-cap stocks are more volatile than large-cap stocks it is very important to focus on companies with solid operational performance.
I looked for stocks with a very good growth prospect. Those stocks would have to show stable financial conditions and generate significant free cash flow. However, in order to find the proper moment for an opening position, a technical analysis with a momentum indicator can be of great assistance for investors.
I have elaborated a screening method, which shows stock candidates following these lines. Nonetheless, the screening method should only serve as a base for further research.
The screen's formula, that will be called SC-11, requires all stocks to comply with all following demands:
1. The stock is included in the Russell 2000 index. Russell Investment explanation: "The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 is a subset of the Russell 3000® Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership. The Russell 2000 Index is constructed to provide a comprehensive and unbiased small-cap barometer and is completely reconstituted annually to ensure larger stocks do not distort the performance and characteristics of the true small-cap opportunity set."
2. Earnings growth estimates next 5 years (per annum) - greater than 15%.
3. Price to free cash flow is less than 15.
4. Total debt to equity is less than 0.4.
5. 10-day moving average is over 20-day moving average, and the cross happened 2 days or less prior to the start of the screen (Short term momentum indicator).
We used Portfolio123's powerful free screener to perform the search. After running this screen on August 29, 2012, we obtained the 3 following stocks:
|Company||Symbol||Last price||Market Cap ($millions)||Trailing P/E||Forward P/E||PEG Ratio|
|Integrated Silicon Solution||ISSI||9.52||273||6.21||8.80||0.41|
|Mercury Computer Systems||MRCY||9.40||300||12.89||9.87||0.55|
Integrated Silicon Solution Inc. (NASDAQ:ISSI)
Integrated Silicon has no debt at all and its price to free cash flow for the trailing 12 months is only 12.8. The average annual earnings growth for the last 5 years was 30.7% and its annual earnings growth estimates for the next 5 years is 15%, all these turns the stock to be very attractive.
Business description from Yahoo Finance: "Integrated Silicon Solution, Inc., a fabless semiconductor company, designs and markets integrated circuits for digital consumer electronics, networking, telecommunications, mobile communications, automotive electronics, and industrial, military, and medical markets. Its primary products include low and medium density DRAM; and high speed and low power SRAM. Integrated Silicon Solution, Inc. was founded in 1988 and is headquartered in San Jose, California."
Mercury Computer Systems, Inc. (NASDAQ:MRCY)
Mercury Computer has no debt at all and its price to free cash flow for the trailing 12 months is only 13.4. The annual earnings growth estimates for the next 5 years is 23.5%, quite impressive fundamental data.
Business description from Yahoo Finance: "Mercury Computer Systems, Inc. designs, manufactures, and markets high-performance embedded, real-time digital signal and image processing systems and software for specialized defense and commercial computing markets. The company operates in two segments, Advanced Computing Solutions (ACS) and Mercury Federal Systems (MFS). The company was founded in 1981 and is headquartered in Chelmsford, Massachusetts."
ValueClick, Inc. (VCLK)
ValueClick has relatively low debt, its long term debt to equity is 0.31 and its price to free cash flow for the trailing 12 months is only 9.89. The average annual earnings growth for the last 5 years was 15.2% and its annual earnings growth estimates for the next 5 years is 15%, which turns the stock to be quite attractive.
Business description from Yahoo Finance: "ValueClick, Inc. provides various products and services that enable marketers to advertise and sell their products through online marketing channels primarily in the United States and the United Kingdom. The company's Affiliate Marketing segment provides technology platforms, advertising network, and customer services, which enable advertisers to create their own commissioned online sales force comprising third-party Website publishers. ValueClick, Inc. was founded in 1998 and is headquartered in Westlake Village, California."
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within 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.