Looking for future winners among the universe of services 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 for which the average analysts' 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 15 (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 0.5.
- 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 04, 2012, I obtained as results the following four stocks:
Franklin Covey Co. (FC)
Franklin Covey has low debt (total debt to equity is 0.38) and its price to free cash flow for the trailing 12 months is only 11.32. The average earnings growth estimates for the next 5 years (per annum) is very high, 27.5%. Only 2 analysts are covering the stock; both of them rate it Strong Buy.
Franklin Covey Co. provides training and consulting services in the areas of leadership, productivity, strategy execution, customer loyalty, trust, sales performance, government, education, and communication effectiveness skills to both organizations and individuals in the United States and internationally. It also offers clients with training in management skills, relationship skills, and individual effectiveness, as well as personal-effectiveness literature and electronic educational solutions. The company was founded in 1983 and is headquartered in Salt Lake City, Utah.
Portfolio Recovery Associates Inc. (PRAA)
Portfolio Recovery has relatively low debt (total debt to equity is 0.46) and its price to free cash flow for the trailing 12 months is only 12.89. The average annual earnings growth estimates for the next 5 years is 15%. Among the 5 analysts covering the stock, 3 rate it Strong Buy and 2 rate it Buy.
Portfolio Recovery Associates, Inc., a financial and business service company, engages in the purchase, collection, and management of portfolios of defaulted consumer receivables. It detects, collects, and processes unpaid and normal-course accounts receivables owed primarily to credit grantors, governments, and retailers. The company was founded in 1996 and is headquartered in Norfolk, Virginia.
RPX Corporation (RPXC)
RPX Corporation has no debt at all and its price to free cash flow for the trailing 12 months is 15. The average annual earnings growth estimates for the next 5 years is 23.6%. Among the 11 analysts covering the stock, 4 rate it Strong Buy, 5 rate it Buy and 2 rate it Hold.
RPX Corporation provides patent risk management solutions in the United States, Europe, and Asia. It offers a subscription-based patent risk management solution that facilitates exchanges of value between owners and users of patents. The company provides a defensive patent aggregation solution in which it acquires patents or licenses to patents and licenses these patents to clients to protect them from patent infringement assertions. RPX Corporation was founded in 2008 and is based in San Francisco, California.
Spirit Airlines, Inc. (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 5 years is very high, 21.4%. Among the 12 analysts covering the stock, 4 rate it Strong Buy and 8 rate it Buy.
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.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SAVE over the next 72 hours.