Looking for future winners among small-cap stocks, I searched for stocks with above-average growth prospects. These stocks would have to reflect stable financial conditions and generate significant free cash flow. I looked also for companies where average analyst recommendations were buy or better.
I used a screening method that showed up stock candidates along the lines above. Nonetheless, the screening method should only serve as a basis for further research. The screen's formula required all stocks to comply with all the following demands:
- 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."
- Earnings growth estimates for the next five years (per annum) is greater than 17%.
- Price to free cash flow is less than 10, (many investors prefer using free cash flow instead of net income to measure a company's financial performance, because free cash flow is more difficult to manipulate. Free cash flow is the operating cash flow minus capital expenditure).
- Total debt to equity is less than 0.2.
- 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 03, 2012, the results threw up the following four stocks:
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Coeur d'Alene Mines Corporation (NYSE:CDE)
Coeur d'Alene has very low debt (total debt to equity is only 0.06) and its price to free cash flow for the trailing 12 months is only 8.03. The average earnings growth estimates next five years (per annum) is very high, 50%. Among the eight analysts covering the stock, 1 rates it strong buy, 4 rate it buy and 3 rate it hold.
Business description from Yahoo Finance: "Coeur d'Alene Mines Corporation, together with its subsidiaries, engages in the ownership, operation, exploration, and development of silver and gold mining properties primarily located in the United States, Mexico, Bolivia, Argentina, and Australia. Its properties include the San Bartolome silver mine in Bolivia; the Palmarejo silver-gold mine in Mexico; the Kensington gold mine in Alaska; and the Rochester silver-gold mine in Nevada. The company owns and operates the Martha silver-gold mine in Argentina, as well as owns a non-operating interest in a silver-base metal mine in Australia. Coeur d'Alene Mines Corporation was founded in 1928 and is based in Coeur d'Alene, Idaho."
Digimarc Corporation (NASDAQ:DMRC)
Digimarc, has no debt at all and its price to free cash flow for the trailing 12 months is only 9.68. The company is also paying dividend, the annual last yield is 2.02% and its average annual earnings growth estimates for the next 5 years is 17.3%. Among the three analysts covering the stock, 2 rate it strong buy and 1 rates it buy.
Business description from Yahoo Finance: "Digimarc Corporation provides media identification and management solutions to commercial entities and government customers in the United States and internationally. It develops and patents intellectual property to differentiate products and technology, mitigate infringement risks, and develop opportunities for licensing. The company's patents relate to various methods for embedding and decoding digital information in video, audio, and images, whether the content is rendered in analog or digital formats. Digimarc Corporation is based in Beaverton, Oregon."
Spirit Airlines (NASDAQ:SAVE)
Spirit Airlines has no debt at all and its price to free cash flow for the trailing 12 months is only 6.93. The average annual earnings growth estimates for the next five years is 21.4%. Among the 12 analysts covering the stock, 4 rate it strong buy and 8 rate it buy.
Business description from Yahoo Finance: "Spirit Airlines, Inc. provides passenger airline services. It provides travel opportunities principally to and from south Florida, the northeast United States, the Caribbean, and Latin America. The company also offers optional travel-related products or services. As of December 31, 2011, it had a fleet of 37 Airbus single-aisle aircrafts. The company was formerly known as Charter One and changed its name to Spirit Airlines, Inc. in 1992. Spirit Airlines, Inc. was founded in 1964 and is headquartered in Miramar, Florida."
Trex, Inc. (NYSE:TREX)
Trex, has no long-term debt at all, and its price to free cash flow for the trailing 12 months is only 8.46. The average annual earnings growth estimates for the next five years is very high, 32.2%. Among the six analysts covering the stock, 5 rate it strong buy and 1 rates it hold.
Business description from Yahoo Finance: "Trex Company, Inc. manufactures and distributes wood/plastic composite products, and related accessories primarily for the residential and commercial decking and railing applications in the United States. The company offers decking products, including Trex Transcend and Trex Enhance protective shells for protection against fading, staining, and scratching; Trex Accents that provides a smooth surface on one side and subtle wood grain on the other; Trex Escapes, a cellular PVC deck board; and Trex Hideaway, a hidden fastening system for specially grooved boards. Trex Company, Inc. was founded in 1996 and is headquartered in Winchester, Virginia."
Disclosure: I am long CDE, SAVE. 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.