Looking for future winners among the large-cap stocks, I searched for stocks with above-average growth prospects. Those stocks would have to show stable financial conditions and generate significant free cash flow. I looked also for companies that are generating enough return to offset the risk of a loss.
I have elaborated a screening method, which shows stock candidates following these lines. Nonetheless, the screening method should only serve as a basis 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 for the next 5 years (per annum) is greater than 16%.
- Price to free cash flow is less than 14, (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 0.4.
- Sharpe Ratio is greater than 1. Sharpe Ratio definition by Investopedia: "A ratio developed by Nobel laureate William F. Sharpe to measure risk-adjusted performance. The Sharpe ratio is calculated by subtracting the risk-free rate - such as that of the 10-year U.S. Treasury bond - from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio returns."
I used Portfolio123's powerful free screener to perform the search. After running this screen on September 3, 2012, I obtained as results the 5 following stocks:
|Company||Symbol||Last Price||Market Cap ($Billions)||Trailing P/E||Forward P/E||PEG Ratio|
|O'Reilly Automotive Inc.||ORLY||84.95||10.10||19.62||15.91||1.15|
AOL Inc. (AOL)
AOL Inc. 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 10.24. The average annual earnings growth estimates for the next 5 years is very high, 19.8%.
AOL Inc. operates as a Web services company that offers a suite of brands and offerings for the worldwide audience. Its business spans online content, products, and services for consumers, publishers, and advertisers. The company provides content produced by journalists from new and traditional media, freelance writers and bloggers, and licensed content from third parties, as well as aggregations of user-generated content through sites, such as The Huffington Post, The Huffington Post Women, The Huffington Post Parents, and The Huffington Post Black Voices. AOL Inc. was founded in 1985 and is headquartered in New York, New York.
IAC/InterActiveCorp has very low debt (total debt to equity is only 0.05) and its price to free cash flow for the trailing 12 months is only 12.9. The average annual earnings growth estimates for the next 5 years is quite high, 16.7%.
IAC/InterActiveCorp engages in the Internet business in the United States and internationally. The company's Search segment develops, markets, and distributes various downloadable toolbars; provides search, reference, and content services through its destination search and other Websites, including Ask.com and Dictionary.com; and aggregates and integrates local advertising and content for distribution to publishers on Web and mobile platforms, as well as markets and distributes mobile applications through which it provides search and additional services. IAC/InterActiveCorp was founded in 1986 and is headquartered in New York, New York.
O'Reilly Automotive Inc. (ORLY)
O'Reilly Automotive has relatively low debt (total debt to equity is 0.31), and its price to free cash flow for the trailing 12 months is only 10.98. The average annual earnings growth estimates for the next 5 years is quite high, 17%.
O'Reilly Automotive, Inc., together with its subsidiaries, engages in the retail of automotive aftermarket parts, tools, supplies, equipment, and accessories in the United States. The company provides new and remanufactured automotive hard parts, including alternators, starters, fuel pumps, water pumps, brake system components, batteries, belts, hoses, temperature control, chassis parts, and engine parts. The company was founded in 1957 and is headquartered in Springfield, Missouri.
Tesoro Corporation (TSO)
Tesoro Corporatio has relatively low debt (long term debt to equity is 0.33), and its price to free cash flow for the trailing 12 months is very low only 6.21. The average annual earnings growth estimates for the next 5 years is quite high, 16.4%.
Tesoro Corporation, together with its subsidiaries, engages in refining and marketing petroleum products in the United States. It operates in two segments, Refining and Retail. The Refining segment refines crude oil and other feed stocks into transportation fuels. The Retail segment sells gasoline, diesel fuel, and convenience store items through company-operated retail stations, and third-party branded dealers and distributors in the western United States. Tesoro Corporation was founded in 1939 and is headquartered in San Antonio, Texas.