Looking for future winners among the universe of tech 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 the average analyst's recommendation is 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 basis for further research.
The screen's formula requires all stocks to comply with all 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."
- Earnings growth estimates for the next 5 years (per annum) is greater than 15%.
- Price to free cash flow is less than 11, (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 3, 2012, I obtained as results the 4 following stocks:
Dice Holdings, Inc. (DHX)
Dice Holdings has very low debt (total debt to equity is only 0.08) and its price to free cash flow for the trailing 12 months is only 9.33. The average earnings growth estimates for the next 5 years (per annum) is very high, 18.8%. Among the 8 analysts covering the stock, 2 rate strong buy, 4 rate buy and 2 rate hold.
Dice Holdings, Inc. provides specialized career Websites and career fairs for professional communities. The company targets employment categories where there is a long-term scarcity of qualified professionals relative to market demand. Its career Websites serve as online marketplaces where employers and recruiters find and recruit prospective employees, and where professionals find relevant job opportunities and information to further their careers. Dice Holdings, Inc. was founded in 1991 and is headquartered in New York, New York.
Digimarc Corporation (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 3 analysts covering the stock, 2 rates strong buy and 1 rates buy.
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.
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 5 years is 14.1%. Among the 38 analysts covering the stock, 12 rate strong buy, 24 rate buy and 2 rate hold.
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.
IXYS Corp. (IXYS)
IXYS, has very low debt (total debt to equity is only 0.11) and its price to free cash flow for the trailing 12 months is only 9.79. The average annual earnings growth estimates for the next 5 years is very high, 53%. Among the 2 analysts covering the stock, 1 rates strong buy and 1 rates buy.
IXYS Corporation, an integrated semiconductor company, designs, develops, manufactures, and markets power semiconductors, digital and analog integrated circuits (ICS), and systems and radio frequency (RF) power semiconductors worldwide. Its power semiconductors include power metal-oxide-silicon field-effect transistors; insulated-gate bipolar transistors; and thyristors and rectifiers, such as fast-recovery epitaxial diodes, which are primarily used to control electricity in power conversion systems comprising uninterruptible power supplies and switch-mode power supplies; motor drives; medical electronics; and renewable energy sources, such as wind turbines and solar systems. The company was founded in 1983 and is headquartered in Milpitas, California.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.