Looking for future winners among the large-cap 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. I looked also for companies that have an average analyst's recommendation of Buy or better.
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 following demands:
- The stock is included in the Russell 1000 index. Russell Investment explanation: "The Russell 1000 Index measures the performance of the large-cap segment of the U.S. equity universe. It is a subset of the Russell 3000® Index and includes approximately 1000 of the largest securities based on a combination of their market cap and current index membership. The Russell 1000 represents approximately 92% of the U.S. market.The Russell 1000 Index is constructed to provide a comprehensive and unbiased barometer for the large-cap segment and is completely reconstituted annually to ensure new and growing equities are reflected."
- Earnings growth estimates next five years (per annum) is greater than 14 %.
- Price to free cash flow is less than 15.
- Total debt to equity is less than 0.4.
- Average analyst recommendations are bullish (less than 2)
I used Portfolio123's powerful free screener to perform the search. After running this screen on September 2, 2012, I obtained as results the four following stocks:
Apple Inc. (AAPL)
Apple Inc., has no debt at all and its price to free cash flow for the trailing 12 months is only 15. The average annual earnings growth in the past five years was 65%, and the average earnings growth estimates next five years (per annum) is also very high, 21.05%. Among the 55 analysts covering the stock, 22 rate strong buy and 26 rate buy.
Business description from Yahoo Finance: Apple Inc., together with subsidiaries, designs, manufactures, and markets mobile communication and media devices, personal computers, and portable digital music players; and sells related software, services, peripherals, networking solutions, and third-party digital content and applications worldwide. Its products and services include iPhone, iPad, Mac, iPod, Apple TV, the iOS and Mac OS X operating systems, iCloud, and various accessory and support offerings, as well as a range of consumer and professional software applications. Apple Inc. was founded in 1976 and is headquartered in Cupertino, California.
Chicago Bridge & Iron Company N.V. (CBI)
Chicago Bridge & Iron, has very low debt (total debt to equity is only 0.03) and its price to free cash flow for the trailing 12 months is only 8.96. The company is also paying dividend, the annual last yield is 0.54% and its average annual earnings growth estimates for the next five years is 16.9%.
Business description from Yahoo Finance: Chicago Bridge & Iron Company N.V. provides conceptual design, technology, engineering, procurement, fabrication, construction, and commissioning services to energy and natural resource industries worldwide. It undertakes various projects in the hydrocarbon, water, and nuclear industries, including above ground storage tanks, elevated storage tanks, liquefied natural gas (LNG) tanks, pressure vessels, and other specialty structures, such as nuclear containment vessels. Chicago Bridge & Iron Company N.V. was founded in 1889 and is headquartered in The Hague, the Netherlands.
Danaher Corp. (DHR)
Danaher Corp., has relatively low debt, its total debt to equity is 0.27 and its price to free cash flow for the trailing 12 months is only 14.03. The average annual earnings growth estimates for the next five years is 14.7%. Among the 21 analysts covering the stock, 8 rate strong buy, 8 rate buy and 5 rate hold.
Business description from Yahoo Finance: Danaher Corporation designs, manufactures, and markets professional, medical, industrial, and commercial products and services primarily in North America, Europe, and Asia/Australia. The company's Test & Measurement segment provides electronic measurement instruments; and monitoring management, and optimization tools for communications and enterprise networks and related services, which are used for the development, manufacture, installation, and operation of electronics equipment, and communications networks and services. Danaher Corporation was founded in 1969 and is headquartered in Washington, District of Columbia.
EMC Corporation (EMC)
EMC, has no long-term debt at all, and its price to free cash flow for the trailing 12 months is only 10.46. The average annual earnings growth estimates for the next five years is 14.1%. Among the 38 analysts covering the stock, 12 rate strong buy, 24 rate buy and 2 rate hold.
Business description from Yahoo Finance: EMC Corporation develops, delivers, and supports the information and virtual infrastructure technologies and solutions. The company offers enterprise storage systems and software, which are deployed in storage area networks (SAN), networked attached storage (NAS), unified storage combining NAS and SAN, object storage, and/or direct attached storage environments, as well as provides backup and recovery, and disaster recovery and archiving solutions. The company was founded in 1979 and is headquartered in Hopkinton, Massachusetts.