Looking for future winners among the universe of financial stocks, I searched for stocks with above-average 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 requires all stocks to comply with all of the following demands:
- The stock is included in the Russell 3000 index. Russell Investment explanation: "The Russell 3000 Index measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market. The Russell 3000 Index is constructed to provide a comprehensive, unbiased, and stable barometer of the broad market and is completely reconstituted annually to ensure new and growing equities are reflected."
- The stock is in the financial sector.
- Earnings growth estimates next 5 years (per annum) is greater than 11%.
- Price to free cash flow is less than 10.
- Total debt to equity is less than 0.2.
- 10-day moving average is over 20-day moving average, and the cross happened 5 days or less prior to the start of the screen (Short term momentum indicator).
I used Portfolio123's powerful free screener to perform the search. After running this screen on September 1, 2012, I obtained as results the two following stocks:
The Bancorp Inc. (TBBK)
The Bancorp has very low debt (total debt to equity 0.12) and its price to free cash flow for the trailing 12 months is only 8.2. The average earnings growth estimates next 5 years (per annum) is 12%. There has been also net insider purchase of the stock this year.
Business description from Yahoo Finance: "The Bancorp, Inc. operates as the holding company for The Bancorp Bank that provides various commercial and retail, and related banking products and services to small and mid-size businesses, and their principals in the United States. The company's deposit products and services comprise checking accounts, savings accounts, healthcare interest bearing accounts, money market accounts, certificates of deposit, and prepaid and payroll cards, as well as commercial accounts, such as general commercial checking, small business checking, business savings, and business money market accounts. The company was founded in 1999 and is based in Wilmington, Delaware."
Walker & Dunlop, Inc. (WD)
Walker & Dunlop has very low debt (total debt to equity 0.12) and its price to free cash flow for the trailing 12 months is only 4.5. The average earnings growth estimates next five years (per annum) is 11.5%. Among the six analysts covering the stock, two give strong buy, three buy and only one hold.
Business description from Yahoo Finance: "Walker & Dunlop, Inc., through its subsidiaries, provides commercial real estate financial services for owners and developers of commercial real estate in the United States. The company originates, sells, and services a range of multifamily properties; and offers a range of commercial real estate finance products, including first mortgage loans, second trust loans, supplemental financings, construction loans, mezzanine loans, bridge/interim loans, and equity investments under the GSE and HUD programs. Walker & Dunlop, Inc. is headquartered in Bethesda, Maryland."