Looking for future winners among the universe of Industrial 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 11%.
- Price to free cash flow is less than 12, (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:
Alamo Group, Inc. (ALG)
Alamo Group has very low debt (total debt to equity is only 0.14) and its price to free cash flow for the trailing 12 months is only 11.79. The average earnings growth estimates for the next 5 years (per annum) is 11%. Only one analyst is covering the stock with strong buy rate.
Alamo Group Inc., together with its subsidiaries, engages in designing, manufacturing, distributing, and servicing agricultural and infrastructure maintenance equipment for governmental and industrial use primarily in the United States, England, France, Canada, and Australia. The company was founded in 1955 and is based in Seguin, Texas.
Chicago Bridge & Iron Company N.V. (CBI)
Chicago Bridge 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 9.19. The average earnings growth estimates for the next 5 years (per annum) is 17.4%. Among the 17 analysts covering the stock, 4 rate strong buy, 8 rate buy and 5 rate hold.
Chicago Bridge & Iron Company N.V. provides conceptual design, technology, engineering, procurement, fabrication, construction, and commissioning services to energy and natural resource industries worldwide. It undertakes various projects in the hydrocarbon, water, and nuclear industries, including above ground storage tanks, elevated storage tanks, liquefied natural gas (LNG) tanks, pressure vessels, and other specialty structures, such as nuclear containment vessels. Chicago Bridge & Iron Company N.V. was founded in 1889 and is headquartered in The Hague, the Netherlands.
Trex Co. Inc. (TREX)
Trex, has no long term debt at all and its price to free cash flow for the trailing 12 months is only 8.45. The average annual earnings growth estimates for the next 5 years is very high 32.2%. Among the 6 analysts covering the stock, 5 rate strong buy and 1 rates hold.
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 Company, Inc. was founded in 1996 and is headquartered in Winchester, Virginia.
Encore Wire Corp. (WIRE)
Encore Wire, has no debt at all and its price to free cash flow for the trailing 12 months is 11.7. The average annual earnings growth estimates for the next 5 years is 13%. Among the 3 analysts covering the stock, 2 rate strong buy and 1 rates hold.
Encore Wire Corporation manufactures and supplies electrical building wires and cables for use in interior electrical wiring applications in commercial and industrial buildings, homes, apartments, and manufactured housings. The company's products include NM-B Cable, a non-metallic sheathed cable primarily used as interior wiring in homes, apartments, and manufactured housing; UF-B Cable, an underground feeder cable that is used to conduct power underground to outside lighting and other applications remote from buildings. Encore Wire Corporation was founded in 1989 and is based in McKinney, Texas