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Arie Goren, Portfolio123 (474 clicks)
Long only, value, research analyst, dividend investing
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In my previous post here, I introduced a screening method looking for small cap growth stocks with positive momentum. In this article I will show the same screening method for growth stocks from the small cap universe, which have a better chance to outperform the market. But because I am using short-term momentum indicators, this screen should be run each week to discover new candidates. Since small cap stocks are more volatile than large cap stocks it is very important to focus on companies with solid operational performance.

I looked for stocks with a very good growth prospects. Those stocks would have to show stable financial conditions and generate significant free cash flow. However, in order to find the proper moment for an opening position, a technical analysis with a momentum indicator can be of great assistance for investors.

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:

  1. The stock is included in the Russell 2000 index. Russell Investment explanation: "The Russell 2000 Index measures the performance of the small cap segment of the U.S. equity universe. The Russell 2000 is a subset of the Russell 3000® Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership. The Russell 2000 Index is constructed to provide a comprehensive and unbiased small cap barometer and is completely reconstituted annually to ensure larger stocks do not distort the performance and characteristics of the true small cap opportunity set."

  2. Earnings growth estimates for the next 5 years (per annum) is greater than 15 %.

  3. Price to free cash flow is less than 10, (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).

  4. Total debt to equity is less than 0.4.

  5. 10-day moving average is over 20-day moving average, and the cross happened 5 days or less prior to the start of the screen (Short-term momentum indicator).

I used Portfolio123's powerful free screener to perform the search. After running this screen on September 5, 2012, I obtained as results the 3 following stocks:

Data: finviz.com

The Hackett Group, Inc. (HCKT)

The Hackett Group has low debt (its long-term debt to equity is 0.30) and its price to free cash flow for the trailing 12 months is very low- only 5.45. The average annual earnings growth estimates for the next 5 years is quite high, 20%.

Business description from Yahoo Finance:

The Hackett Group, Inc. operates as a strategic advisory and technology consulting firm primarily in the United States and western Europe. The company offers executive advisory programs, benchmarking, business transformation, and technology consulting services, with corresponding offshore support. The company was formerly known as Answerthink, Inc. and changed its name to The Hackett Group, Inc. in January 2008. The Hackett Group, Inc. was founded in 1991 and is headquartered in Miami, Florida.

Chart: finviz.com

USANA Health Sciences Inc. (USNA)

USANA Health has no debt at all and its price to free cash flow for the trailing 12 months is only 9.02. The annual earnings growth estimates for the next 5 years is 16%.

Business description from Yahoo Finance:

USANA Health Sciences, Inc. develops, manufactures, distributes, and sells nutritional and personal care products worldwide. It offers the USANA Nutritionals product line, which consists of essentials, which include vitamin and mineral supplements that provide a foundation of nutrition for various age groups; optimizers that are targeted supplements supporting needs, such as cardiovascular health, skeletal/structural health, and digestive health; and foods comprising low-glycemic meal replacement shakes, snack bars, and other related products that offer optimal macro-nutrition. The company was founded in 1992 and is headquartered in Salt Lake City, Utah.

Chart: finviz.com

ValueClick, Inc. (VCLK)

ValueClick has low debt (its long-term debt to equity is 0.31) and its price to free cash flow for the trailing 12 months is only 9.88. The average annual earnings growth for the last 5 years was 15.2% and its annual earnings growth estimates for the next 5 years is 15%.

Business description from Yahoo Finance:

ValueClick, Inc. provides various products and services that enable marketers to advertise and sell their products through online marketing channels primarily in the United States and the United Kingdom. The company's Affiliate Marketing segment provides technology platforms, advertising network, and customer services, which enable advertisers to create their own commissioned online sales force comprising third-party Website publishers. ValueClick, Inc. was founded in 1998 and is headquartered in Westlake Village, California.

Chart: finviz.com

Source: 3 Small Cap Growth Companies With Positive Momentum