One way to find stocks with a better chance to outperform the market is to look for a certain type of growth stocks. Those stocks would have to show stable financial conditions and generate significant free cash flow, but cannot be too expensive at the moment. 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:
- 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%.
- The company has no long term-debt at all.
- 10-day moving average is over 20-day moving average, and the cross happened 2 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 07, 2012, I obtained as results the 4 following stocks:
Acacia Research Corporation (ACTG)
Acacia Research has no debt at all and its price to free cash flow for the trailing 12 months is 29.6. The average annual earnings growth for the past 5 years was very high, 158% and the average annual earnings growth estimates for the next 5 years is also very high, 38%.
Acacia Research Corporation, through its subsidiaries, acquires, develops, licenses, and enforces patented technologies in the United States. It assists patent owners with the prosecution and development of their patent portfolios; protection of their patented inventions from unauthorized use; generation of licensing revenue from users of their patented technologies; and enforcement against unauthorized users of their patented technologies.. Acacia Research Corporation was founded in 1992 and is based in Newport Beach, California.
Destination Maternity Corporation (DEST)
Destination Maternity has no long-term debt at all, and its price to free cash flow for the trailing 12 months is only 11.3. The average annual earnings growth for the past 5 years was 16.57%, and the average annual earnings growth estimates for the next 5 years is high, 18%.
Destination Maternity Corporation engages in the design and retail of maternity apparel. It offers casual and career wear, formal attire, lingerie, sportswear, and outerwear. As of June 30, 2012, the company operated 2,016 retail locations, including 636 stores; and 1,380 leased department locations. It operates stores under the Motherhood Maternity, A Pea in the Pod, and Destination Maternity names. Motherhood Maternity brand serves the value-priced portion of the maternity apparel business with stores located in regional malls, strip and power centers, and central business districts. Destination Maternity Corporation was founded in 1980 and is headquartered in Philadelphia, Pennsylvania.
MKS Instruments Inc. (MKSI)
MKS Instruments has no debt at all and its price to free cash flow for the trailing 12 months is only 11.3. The average annual earnings growth estimate for the next 5 years is very high, 20%.
MKS Instruments, Inc., together with its subsidiaries, provides instruments, subsystems, and process control solutions that measure, control, power, monitor, and analyze parameters of manufacturing processes worldwide. It offers instruments and control systems, such as pressure measurement and control, materials delivery, gas composition analysis, and control and information technology products. MKS Instruments, Inc. was founded in 1961 and is headquartered in Andover, Massachusetts.
Omnicell Inc. (OMCL)
Omnicell Inc. has no debt at all and its price to free cash flow for the trailing 12 months is only 15.6. The average annual earnings growth estimates for the next 5 years is quite high, 19%.
Omnicell Inc. provides automated solutions for hospital medication and supply management primarily in the United States and Canada. The company offers medication use products, which include OmniRx that automates the management and dispensing of medications at the point of use; SinglePointe, a software product that controls medications on a patient-specific basis; AnywhereRN, a software that allows nurses to remotely operate automated dispensing cabinets; Pandora Analytics, a reporting and data analytics tool; and Savvy Mobile Medication System, a mobile platform for hospital information systems. Omnicell, Inc. was founded in 1992 and is headquartered in Mountain View, California.