Looking for future winners among the universe of Consumer Discretionary 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 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 05, 2012, I obtained as results the 4 following stocks:
Arctic Cat Inc. (ACAT)
Arctic Cat 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 10.46. The average earnings growth estimates for the next 5 years (per annum) is 16%. Among the 7 analysts covering the stock, 2 rate strong buy, 3 rate buy and 2 rate hold.
Arctic Cat Inc. designs, engineers, manufactures, and markets snowmobiles and all-terrain vehicles (ATVs) under the Arctic Cat brand name. It also provides related parts, garments, and accessories. The company offers accessories consisting of bumpers, cabs, luggage racks, lights, snow plows, backrests, windshields, wheels, track systems, and winch kits; shocks, attachments, and float avalanche airbags; and maintenance supplies, such as oil and fuel additives. Arctic Cat Inc. was founded in 1982 and is based in Plymouth, Minnesota.
Coinstar, Inc. (CSTR)
Coinstar, has relatively low debt (long term debt to equity is 0.31) and its price to free cash flow for the trailing 12 months is only 6.13. The average annual earnings growth estimates for the next 5 years is 18.6%. Among the 14 analysts covering the stock, 4 rate Strong Buy, 4 rate Buy and 6 rate Hold.
Coinstar, Inc., through its subsidiaries, provides automated retail solutions primarily in the United States, Canada, Puerto Rico, Ireland, and the United Kingdom. The company owns and operates self-service Redbox kiosks that enable consumers to rent or purchase movies and video games; and self-service coin-counting kiosks where consumers can convert their coin to cash, a gift card, or an E-certificate. Coinstar, Inc. was founded in 1991 and is headquartered in Bellevue, Washington.
1-800-Flowers.com Inc. (FLWS)
1-800-Flowers.com, has low debt (total debt to equity is only 0.18) and its price to free cash flow for the trailing 12 months is 10.4. The average annual earnings growth estimates for the next 5 years is 16%. Among the 5 analysts covering the stock, 1 rates Strong Buy, 2 rate Buy and 2 rate Hold.
1-800-Flowers.com, Inc. together with its subsidiaries, operates as a florist and gift retailer in the United States. The company offers a range of products, including fresh-cut flowers, floral arrangements and plants, gifts, popcorn, gourmet foods and gift baskets, cookies, chocolates, candy, and wine through its telephonic and online sales channels, company-owned and operated retail floral stores, and franchised stores.
ZAGG Inc. (ZAGG)
ZAGG, has low debt (total debt to equity is only 0.37) and its price to free cash flow for the trailing 12 months is only 13.11. The average annual earnings growth estimates for the next 5 years is very high, 24.1%. Among the 6 analysts covering the stock, 3 rate Strong Buy and 3 rate Buy.
ZAGG Inc, together with its subsidiaries, designs, manufactures, and distributes protective coverings, audio accessories, and power solutions for consumer electronics and hand-held devices primarily in the United States and Europe. The company is headquartered in Salt Lake City, Utah.