One way to find stocks with a better chance to outperform the market is to look for a certain type of stocks with above average growth prospects. 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, and I looked also for companies that the average analyst's recommendation is buy or better. 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 12%.
- Price to free cash flow is less than 14, (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.
- 10-day moving average is over 20-day moving average, and the cross happened 3 days or less prior to the start of the screen (Short term momentum indicator).
- 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 07, 2012, I obtained as results the 3 following stocks:
HFF, Inc. (HF)
HFF, Inc. has no long-term debt at all and its price to free cash flow for the trailing 12 months is only 10.98. The average annual earnings growth estimates for the next 5 years is 15%. Among the 2 analysts covering the stock, 1 rates strong buy and 1 rates buy.
During the second quarter of 2012, HF further strengthened its balance sheet when compared with the second quarter in 2011, and it significantly increased its cash and cash equivalent position by over $45 million to more than $148 million when compared with its cash and cash equivalent position of $102.6 million in the second quarter of 2011. All these factors make the stock very attractive.
HFF, Inc. provides commercial real estate and capital markets services to users and providers of capital in the commercial real estate industry in the United States. The company offers debt placement services, including construction and construction/mini-permanent loans, adjustable and fixed rate mortgages, entity level debt, mezzanine debt, forward delivery loans, tax exempt financing, and sale/leaseback financing to the owners of various types of properties, such as office, retail, industrial, hotel, multi-housing, self-storage, assisted living, nursing homes, condominium conversions, mixed-use properties, and land. The company was founded in 1982 and is based in Pittsburgh, Pennsylvania.
MEDNAX, Inc. (MD)
MEDNAX, Inc. has no debt at all, and its price to free cash flow for the trailing 12 months is only 13.7. The average annual earnings growth estimates for the next 5 years is 13.93%. Among the 14 analysts covering the stock, 7 rate strong buy, 4 rate buy and 3 rate hold.
For the second quarter of 2012, MEDNAX earned $1.22 Per Share and exceeded its second-quarter earnings guidance. For the 2012 third quarter, MEDNAX expects earnings will be in a range of $1.25 to $1.30 per share. This range assumes that total same-unit revenue for the three months ended September 30, 2012 will grow by 1.0 percent to 3.0 percent from the prior-year period. MD stock seems to be a good investment right now.
MEDNAX, Inc., together with its subsidiaries, provides neonatal, maternal-fetal, other pediatric subspecialties, and anesthesia physician services in the United States and Puerto Rico. It offers neonatal care services, including clinical care to babies born prematurely or with complications within specific units at hospitals through neonatal physician subspecialists, neonatal nurse practitioners, and other pediatric clinicians. MEDNAX, Inc. was founded in 1979 and is based in Sunrise, Florida.
Monotype Imaging Holdings Inc. (TYPE)
Monotype Imaging Holdings has low debt (total debt to equity is only 0.2) and its price to free cash flow for the trailing 12 months is only 13.2. The average annual earnings growth estimates for the next 5 years is 12.33%. Among the 16 analysts covering the stock, 3 rate it a strong buy, 2 rate it a buy and 1 rates it a hold.
For the second quarter of 2012 revenue was a record $38.5 million, a 24 percent increase year-over-year. Cash flow from operations was $14.9 million, a 43 percent increase year-over-year. The company announced a cash dividend program with an initial quarterly rate of $0.04 per share of common stock. All these factors make the stock quite attractive.
Monotype Imaging Holdings Inc., through its subsidiaries, provides end-user and embedded text imaging solutions and services for use in print, Web, and mobile environments that enable people to create and consume content on various devices. It offers a collection of approximately 170,000 font products consisting of its own and third-party owned fonts through its e-commerce Websites, including fonts.com, linotype.com, ascenderfonts.com, and itcfonts.com; a Web font service through webfonts.fonts.com for Website design; monotype, linotype, ITC, and ascender originals typeface libraries; custom font design services for corporate branding and identity; and PCL 6 and PostScript 3 font collections. Monotype Imaging Holdings Inc. is headquartered in Woburn, Massachusetts.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.